Customers Bancorp, Inc. (CUBI) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Customers Bancorp, Inc. Second Quarter 2026 Earnings Webcast. [Operator Instructions] I will now hand the conference over to Phil Watkins, Executive Vice President, Head of Corporate Development and Investor Relations. Phil, please go ahead.

Thank you, Ellen, and good morning, everyone. Thank you for joining us for the Customers Bancorp's earnings webcast for the second quarter of 2026. We'd like to remind you that today's presentation may contain forward-looking statements, which are subject to uncertainty and changes in circumstances. Actual results may differ materially from management's expectations due to a variety of factors, which are described in our earnings materials and our SEC filings. We also reference non-GAAP financial measures, so it's important to review our GAAP results in the presentation and the reconciliations in the appendix. The presentation you will see during today's webcast has been posted on the Investors web page of the bank's website at www.customersbank.com. You can also download a PDF of the full press release. Please refer to our SEC filings, including our most recent Form 10-K and 10-Q and our current reports on Form 8-K for a more detailed description of the assumptions and risk factors related to our business. Copies of these filings may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time, it is my pleasure to introduce Customers Bancorp CEO, Sam Sidhu.

Thanks, Phil. Good morning, everyone, and welcome to Customers Bancorp's Second Quarter 2026 Earnings Call. I'm joined this morning by our Chief Financial Officer, Mark McCollom. I'll take you through a few key highlights from the second quarter, give you an update on our strategic priorities, and then Mark will provide additional detail on our financials. Customers Bank continues to deliver for our customers and shareholders with this quarter's results once again reflecting strong consistent financial results that come from disciplined execution of our differentiated strategy by a best-in-class team. Turning to Slide 4. In the second quarter, we -- the second quarter was further evidence of our core strategy firing on all cylinders with consistent and reliable financial performance and growth. A few highlights. Total loans grew 4% in the quarter and 17% year-over-year to a record $18 billion. Total deposits grew over $140 million to a record $21.7 billion. Noninterest-bearing deposits hit a second consecutive record at $6.9 billion or 32% of total deposits. NII increased 9% year-over-year. Tangible book value per share crossed $65, a period-end record up 16% year-over-year, extending our industry-leading pace. That 16 consecutive records for book value, 4 for loans and 7 for total deposits. And we did all of this while maintaining pristine credit quality and robust capital levels, even while growing the balance sheet and modestly buying back shares. On Slide 5, you can see our priorities for 2026. The same for we've been executing against all year. I'll provide an update on each again this quarter, starting with AI on Slide 6. Last quarter, we told you we were operationalizing AI and automation across Customers Bank. We're seeking transformational change with the goal of becoming the nation's leading AI-native regional bank. To give you some color on what that means, let me start by saying that none of this happens by chance, every use case we build moves through the same repeatable cycle. We create AI agentic pods by pairing our engineers with subject matter experts that own the work, shadow the real workflow, and build agents in our own data and systems, starting with the highest impact opportunities. And we then validate and measure the real impact first and only then does it get absorbed into the operations of the bank. We're driving this through 2 complementary tracks: top-down strategic initiatives, and extensive bottoms-up use cases being built organically by our teams. Our top-down road map spans 3 domains: lending, deposits, and payments. That top-down work took a huge step forward in April when we announced the strategic collaboration with OpenAI, an expansion of a relationship that began back in 2023. This isn't a typical enterprise licensing relationship with a frontier model provider. It's embedding OpenAI engineers side-by-side with our team, building custom capabilities bespoke for our processes. Let me start by giving you an update on the first top-down initiative, loans. Our engineers have architected a multi-agentic credit underwriting process that can allow us to be ready to close commercial loans in 7 days or less versus industry norms of 30 to 60 days. I'm thrilled to say that we piloted this tool this quarter and successfully closed C&I and CRE loans that utilizes underwriting engine within a week. That's an 85% reduction in readiness to close, which should result in huge productivity and revenue gains through more business, but more importantly, it will deliver an enhanced client experience and confidence in our bank. Moving to deposits. We kicked off an effort to rebuild our commercial onboarding process from scratch, with an ambitious target of opening complex commercial accounts in minutes, not hours. We expect to have real progress and an update for you on this next quarter. On payments, we're way ahead of the curve here. We believe we were the first bank to publish an MCP or Model Context Protocol, last year for our commercial payments customers. One revenue-generating use case we're advancing on is a modernized, fully-ratable network for 24/7 cross-border payment settlement for our cubiX network that will share more detail as it develops. Now for a few examples from the bottom-up side, which is reaching every corner of our institution. We're equipping bankers to drive increased conversion, which has led to a 110% improvement in select front office areas prospecting success rates. To help make that tangible just one commercial deposit group has averaged $2 million per month in noninterest-bearing deposit growth since the launch of the tool. In the back office, we're using agentic orchestration to enable products for new deposit customers, reducing setup times from an hour down to a couple of minutes. In risk and compliance, we're leveraging AI-powered KYC screen, which allows our team to boost their productivity by 50%. And in corporate functions, we're reviewing legal documents in minutes, not hours, tracking accuracy across regulatory filings, and have shortened our month-end closing cycle by 60%. Everything I've walked you through here is proprietary and purpose built in-house by customers bank employees. To give you some context on the impact we're experiencing, our team has now saved at least 46,000 hours through AI-enabled workflow automation, up about 65% from last quarter and equivalent to 24 FTEs. They've built more than 600 agents and custom GPTs, up 20% in the last 60 days alone. 100% of our team members in our AI licensed up from 75% last quarter, and we're providing extensive training and support to our entire organization. And I am personally leading a 40-person and growing team today representing about 5% of our workforce focused on AI workflow transformation. How will this translate financially for us? Well, we've set a goal of getting to a low 40s run rate efficiency ratio in 2027 versus the 50% or so we're at today through a combination of revenue growth and increased productivity. I've said it before, and I'll say it again, we believe AI is the most significant opportunity in a generation for a bank of our size, and we intend to be the one that proves what serious adoption looks like. Now moving to Slide 7 and cubiX. We've said for some time that excelling in payments is critical to future success in our industry. Let me first frame where our cubiX industry expansion stands. DA 24/7 settlement was our foundation. Then we move to mortgage finance clients. And now real estate has become a fast-growing vertical. To put it in perspective from what was essentially a start-up vertical based on adoption and pipeline, we now project this vertical could represent 20% of all payment units. Capital markets is an opportunity ahead. I think traditional finance exchanges as the whole industry moves toward continuous around-the-clock trading. We are also looking at incubating new verticals, facilitating 24/7 cross-border and other 24/7 settlement transactions as customers and in some cases, their agents continue to expect faster payments. The combination of a cutting-edge product with a best-in-class team is already producing strong results. Quarter-over-quarter, in the real estate payments vertical, transaction volume is up roughly 7x, spot deposit balances are up more than 4x, reaching $400 million in just a few quarters, and we've added approximately 350 new deposit accounts. A major milestone in the quarter is that we surpassed $5 trillion in cumulative transaction activity. That is a truly staggering figure and shows just how mission-critical this payments network is to our clients. And importantly, the unit count of transactions is continuing to accelerate. To put that in perspective, year-to-date, we've processed over 200,000 cubiX internal transfers, which has doubled from the same time last year. and we remain in the early innings of unlocking the full value of this platform. At the end of last year, I told you we did not expect this to be a growth vertical. However, based on tangible progress we are seeing through the end of this year, we now expect cubiX to be a growth area in 2027 as these new verticals continue to scale with granular diversified low-cost deposits. Turning to Slide 8. I want to discuss what we believe is a driving engine behind our success, our organic growth flywheel. It starts with service. Our Net Promoter Score is 81, nearly double the industry benchmark of 41 and puts us at the top of the industry. That level of service drives deeper client engagement, stronger retention, more referrals. That engagement builds momentum and financial performance. That performance allows us to reinvest into people and technology. That investment helps us attract and retain top teams who bring clients and service expertise starting the cycle over again. And you can see the output on the right of the slide. We're the #1 core EPS compounder and #2 intangible book value per share compounder among our peers. And our organic growth deposit rate is roughly at 2x the peer median. None of this works, though, without the right people. And that brings me to our team recruitment strategy update, which I'll cover on the next slide. The teams we've recruited since 2023 now represent 18% of our deposit base, about 1/5 of the entire franchise. Let that sink in. In just 36 months entirely organically, we've built roughly 1/5 of this bank through recruiting. And these new teams are extremely accretive to the bank's efficiency ratio, with mature vintages operating at efficiency ratios in the 20% to 30% range. We want to spotlight the 2025 vintage higher than the last 12 months. These teams already hold more than $0.5 billion in deposits across 1,600 accounts or over 6% of our total commercial accounts. They're incredibly granular, today averaging about $340,000 per account. Due to the smaller balances and operational nature, 63% are noninterest-bearing and a spot cost of about 70 basis points. And similar to last quarter, the noninterest-bearing deposit pipeline for new teams is incredibly around $250 million in the next 90 days or so. And the economics are compelling. Similar to our 2024 teams, our 2025 teams have already reached profitability in approximately 3 quarters. They run at roughly 1.7x deposits to loans, generating a spread of around 500 basis points on top of the excess low-cost deposits they bring. And I'm happy to share a quick preview of what we've accomplished with our 26th vintage. Year-to-date, about 30 team members have joined and are in advanced discussions to join with 4 teams expected to join this quarter. These teams already have a 9-figure loan and deposit pipeline to capture by year-end. And we're optimistic that these teams could similarly turn profitable within 12 months. With that, I'll turn it over to Mark to talk you through the financials in more detail.

Thanks, Sam, and good morning, everyone. My comments will begin on Slide 10. We're only showing you GAAP earnings this quarter as we did not have any material adjustments to these GAAP results. We delivered EPS of $2.05, up roughly 4% from last quarter and 18% year-over-year, continuing the consistent high-quality earnings growth this franchise has delivered. ROE and ROA came in at 13.2% and 1.13%, respectively. Turning to Slide 11 and the broader deposit franchise. Total deposits ended the quarter at $21.7 billion, an increase of $2.7 billion year-over-year. While total deposit growth for the quarter was more measured, this mass a lot of activity under the surface. First, we continue to remix less strategic deposit of over $600 million in the quarter, picking up 150 basis points in bucking industry trends. Second, the quality continued to improve, and I'll highlight a few stats. Noninterest-bearing deposits grew by about $175 million in the quarter to a second consecutive period end record of $6.9 billion. As you can see on the top right chart, over the last 2 years, we've increased our noninterest-bearing deposit percentage from 25% to 29% and to 32% of total deposits, top quartile among regional bank peers. Excluding our DA channel, noninterest-bearing balances grew approximately $375 million during the quarter. This is up 14% quarter-over-quarter and 37% year-over-year. In the last 12 months, we've added over $840 million of noninterest-bearing deposits outside of the DA channel, a direct result of the commercial team recruitment strategy Sam just walked through. I want to be clear about our ambition here because it helps you understand the potential we see in the franchise. Our goal is to have the highest percentage of noninterest-bearing deposits within our peer group, and we're almost there. Turning to Slide 12 and loans. Total loans grew $624 million or 4% in the quarter to $18 billion, double the 2% linked quarter growth for the industry. On a year-over-year basis, loans are up 17%. Just as important as the pace of growth is the breadth. Commercial growth was diversified across the franchise, led by verticals like commercial real estate, real estate specialty finance and community C&I, with smaller contributions from multiple other verticals. As we always say, the mix of top contributors may shift from quarter-to-quarter. But the diversified nature of our origination platform increases the confidence in our guidance as it lets us grow while remaining disciplined on structure and pricing. Slide 13 covers our net interest income and margin. We view the second quarter as the inflection point for the year. Net interest income was over $193 million, up $16 million or 9% year-over-year, driven by higher average loan balances and a lower cost of funds. On a linked quarter annualized basis, Net interest income grew about 4%. We remain focused on that NII growth, which continues to be strong, as I just outlined. As we signaled last quarter, our second quarter net interest margin of 3.17% is expected to be the low point for 2026. We expect our net interest margin to move back toward first quarter levels in the third quarter and to build from there. We also expect net interest income to be stronger in the back half of the year. This NIM and NII trajectory is grounded in a few factors. Our deposit pipelines are robust and are expected to convert into continued low-cost deposit gathering. We have continued deposit remixing opportunities in the second half of the year. The 2025 teams have hit their stride and are helping to drive that momentum. And a surge in loan growth in the second half of the second quarter creates momentum for the third quarter as well as a strong pipeline for the third quarter. Despite the headwinds the industry is facing, we continue to have levers on both sides of the balance sheet, and we remain optimistic about strong NII growth and steady margin tailwinds during the second half of 2026. Moving to Slide 15 and expenses. Noninterest expense was $114.9 million in the quarter, which included about $1 million of severance. The story here continues to be positive operating leverage. Through the first 6 months of 2026, our core efficiency ratio improved by approximately 200 basis points and revenue growth outpaced expense growth, generating roughly 430 basis points of positive operating leverage over the same period last year. Our noninterest expense as a percent of average assets was 1.82% among the lowest of any regional bank peer. I'd underscore that we're delivering this efficiency while investing heavily in people and technology. The ability to grow the franchise and improve efficiency at the same time is supported by our second Operational Excellence 2 initiative, or OE2, which I'll cover on Slide 16. Coming into the year, OE2 targeted $20 million in annual run rate benefits. Last quarter, we raised that to $30 million by adding $10 million to Phase 2. I'm pleased to report that we have now achieved the full $30 million run rate target. Roughly $4 million of this comes from revenue initiatives and about $26 million came from expense initiatives. Stepping back, that makes 2 consecutive years of over $30 million in Operational Excellence accomplishments. These savings are being reinvested directly into the franchise. It's how we've been able to both hire 18 new teams delivering $3.9 billion of deposit growth since 2023, while maintaining a top decile OpEx ratio compared to our peers. This has become a repeatable muscle for us and a key component of sustaining positive operating leverage. On Slide 17, tangible book value per share grew to $65.20, up 3% quarter-over-quarter and 16% year-over-year. That's approximately 2.5x where we stood at the end of 2019, a CAGR of roughly 15%, compared to about a 5% CAGR for regional bank peers over the same period. We view tangible book value compounding as the clearest long-term measure of shareholder value creation. Turning to Slide 18. Our capital position remains strong and continues to provide meaningful strategic flexibility. Our CET1 ratio was 12.8%, and our TCE to TA ratio grew 40 basis points year-over-year to 8.3%, even as tangible assets grew 18% over the same period. Strong organic earnings position us to support continued balance sheet growth and when appropriate, to return capital to our shareholders. On Slide 19, credit quality remains stable across the board. Nonperforming assets as a percent of total assets remain below the regional bank peer median. Net charge-offs continued to perform well with commercial charge-offs remaining low at just 18 basis points and our smaller consumer portfolio performing well. Reserve coverage was solid at 293%. I'll close with our management guidance on Slide 20 in which we are reaffirming all key metrics. For loans, as I mentioned earlier, we continue to see good growth opportunities for many different verticals. For deposits, the account and balance momentum from our new teams and real estate payments vertical are looking strong going into the second half of the year. The combination of loan and deposit growth opportunities should result in solid growth in net interest income. On noninterest expense, we're maintaining our target even as we continue to invest significantly in people and technology. And lastly, on capital and taxes, we have no changes to our targets. Taken as a whole, we believe this guidance sets up for a strong second half to 2026. And with that, I'll pass the call back to Sam for closing remarks before we open up the line for your questions.

Thanks, Mark. To wrap up, in the second quarter, we delivered strong, consistent growth across every major dimension of the franchise. AI continues to integrate into the operating fabric of [indiscernible] form our core lending, deposit onboarding and payments infrastructure. Our commercial payments platform surpassed $5 trillion in cumulative activity, and we're continuing to expand into new verticals and use cases. Deposits grew 15% year-over-year and noninterest-bearing deposits hit another record. Our new teams added about $600 million so far this year and our second wave of 2026 team should be starting in the third quarter. Loans grew 17% year-over-year NII increased 9% year-over-year and our EPS grew 18% year-over-year. And lastly, we continue to deliver strong positive operating leverage while investing meaningfully as you heard from Mark and people and technology. With that, we'll now open up the line for questions.

[Operator Instructions] Your first question comes from the line of Steve Moss with Raymond James.

Good morning, and nice quarter here. Sam, maybe just starting off with your comments here. You mentioned you're looking to get the real estate payments -- real estate vertical to be about 20% of payments here. Just kind of curious as to how you're thinking about the timing of that 20% goal?

Steve. That is a 2027 goal. We sort of forecasted a little bit about operationally how we think about sort of units and payments volume. So we do think that's sort of a medium-term goal.

Okay. Got it. And then just kind of thinking about you have a lot of drivers here with regard to deposit growth. And clearly, a lot of noninterest bearing added this quarter. Just kind of curious what are the -- what's the marginal cost of deposits these days that you're bringing on? It seems like is probably lower than what we were thinking about in the past? And how much of a cadence maybe could we see in terms of funding cost declines if the short -- if the Fed holds [indiscernible] at current levels?

Yes. So I'm happy to take that, Steve. So really, I think you hit the nail on the head. We are basically, I think, seeing a convergence of 2 of our top priorities. One is organic loan or deposit growth. So the teams that we're recruiting are bringing in 25% to 30% as high as sometimes 35% noninterest-bearing deposits and [indiscernible] accounts. And then our payments-related commercial teams are bringing in almost exclusively noninterest-bearing deposits, and hence, you're getting that over 50%. And that's really what's driving this. And so we do continue to see this level of very high index noninterest-bearing deposit growth coming from our commercial teams, which I think is a testament to our heads-down focus and dedication to our priorities. As you think about that, what does that mean? Let's say the marginal cost of deposits just for ease of simplicity is at Fed funds and you're bringing in 60% at noninterest-bearing, majority of our loan growth is coming in at about a 6% NIM. So we'll see our interest-bearing cost of deposits did go down this quarter. we remixed about $600 million or so of higher cost funding, which is happening on the level of the deposits and we'll continue to hopefully see tailwinds in our margin in addition to NII growth, which we've always, sort of, said is paramount for us.

Okay. Great. Appreciate that. And if I could just sneak one last one in. On the loan pipeline, good to see another quarter of loan growth. Just curious like, I mean, obviously, it's your strongest quarter how is that loan pipeline these days? And I know it bounces from quarter-to-quarter, but any color you could give in terms of strength of verticals here.

Yes, Steve. This is Mark. Yes, as you know, we always say that quarter-to-quarter different verticals are going to step to the forefront and be the leader in that loan growth. Our loan pipelines feel good. We have not changed our guidance here midyear, but we feel very optimistic about continuing strong loan growth in the back half of the year.

Your next question comes from Kelly Motta with KBW.

I guess, kicking it off on the balance sheet. It looks like the average cash balances were down a bit, which weighed on your NII. Can you provide color was that related -- much of this was related to declines in average cubiX? I apologize, I didn't see that in the deck.

Kelly. You were coming in and out a little bit, and I think I heard the full question. Let me know if I missed anything. I think that what I would sort of say as it relates to your question about noninterest-bearing deposits and linking it back to cubiX. As you are aware and maybe sort of also references some of your notes, DA trading was down in the second quarter. especially in May and June and so lower trading activity leads to lower payments float. In the presentation, we did reference the DA balances were $3.8 billion. but total cubiX balances were roughly flat in the quarter, and that's really a testament to sort of the growth in the real estate payments vertical. And I think I'd also just highlight that what's interesting about cubiX is Steve touched on in a little bit of percent of units as we look out in the next sort of 12 to 18 months, but also just on our existing platform, the number of transactions actually doubled year-over-year. So we continue to deepen and integrate with our customer base today.

Okay. And I see those spot balances in the deck, the footnote were about $3.8 billion, which didn't fall as much as I had expected. Do you have -- what happened with the average balances there?

Yes. So on a spot basis, it was about $200 million. I don't know the exact average. I think it's about $300 million on specific to that DA, but we made that up in granular real estate cubic deposits by June 30.

Got it. That's helpful. And then with the NII guide reiterated, it implies a ramp in the second half of the year, given kind of this, I think, Q2 is, what you've described as the low point kind of jumping off. What gives you confidence in being able to really ramp that NII to get into that range?

Yes. And that's right, Kelly. It's Mark. Yes, that's exactly right. It's really the exit point at June 30. Both in the pipelines on the deposit side plus actual loan balances that we saw much of our loan growth in the second quarter came in the month of June. So the exit points of both loans and deposits plus just the momentum from our different verticals give us confidence for the back half of the year, both on an NII basis and on a margin basis.

Your next question comes from the line of Anthony Elian with JPMorgan.

This is Mike on for Tony. On cubiX saw some traction with the real estate vertical this quarter added about $300 million I know you mentioned reaching the 20% goal is sort of a 2027 event. But you guys also mentioned that, that vertical has a 9-figure pipeline per quarter through year-end. So I guess, how much of that pipeline do you sort of expect to convert in 2026, more specifically into actual deposit growth?

Specifically, as we talked about earlier in the year, we sort of migrated some of our mortgage finance customers on to cubiX who are looking for sort of that operational payments lift, then we added new to the bank real estate customers. Those 2 in aggregate are about $1 billion today, and we expect that we are hopeful our internal target is getting that to about $1.5 billion by the end of the year.

Okay. Great. And then on Slide 6, there's a lot of great metrics here on the AI efforts. On an expense basis, you guys already gave some good context on how it's benefiting the company today, but are you able to quantify at all how much in expense savings you've sort of recognized already from these AI efforts?

So I think that we're really -- these aren't software plug-ins we're actually building proprietary software and some of the larger lifts actually take quarters, not weeks the tech that we're sort of dealing with that has really helped us work on transformational workflow automation is really only about 6 months old or so. So we're seeing productivity lift today. That will help us sort of think about reducing expense investment in the future. But really, our focus is decoupling our expense base from our revenue growth as we get into 2027. So I think we've put a very ambitious '27 run rate goal out there, and that kind of combines the 2 of those together.

Your next question comes from the line of Tyler Cacciatori with Stephens.

I guess just headed back to digital assets. I just wanted to clarify, that $3.8 billion, that's exclusive of the mortgage finance and real estate balances, right?

That's right.

And then those are all noninterest-bearing?