Customers Bancorp (CUBI) Q2 2026 earnings call transcript

Thank you, Ellen, and good morning everyone. Thank you for joining us for the Customer's Bancorps Earnings webcast for the 2nd 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-GAP financial measures, so it's important to review our GAP 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' webpage of the bank's website at www. customersbanc. com. You can also download a PDF of the full press release.

Please refer to our SEC filings, including our most recent form 10K and 10Q, and our current reports on form 8K 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 and core CEO Sam Sidu.

Thanks, Phil. Good morning, everyone, and welcome to customers' bank or second quarter 2026 earnings call. I'm joined this morning by our Chief Financial Officer, Mark McCollum. 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 four, in the second quarter, 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.

Non-interest 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 across $65, a period and record up 16% year over year extending our industry leading pace. That's 16 consecutive records for book value, four for loans, and seven 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 five, you can see our priorities for 2026. The same four we've been executing against all year. I'll provide an update on each again this quarter starting with AI on slide six. Last quarter, we told you we were operationalizing AI and automation across customers bank.

We're seeking transformational change with a 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 in the operations of the bank. We're driving this through two complementary tracks, top down strategic initiatives and extensive bottoms up use cases being built organically by our teams.

Our top down roadmap spans three domains, lending deposits and payments. That top down work took a huge step forward in April when we announced a 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 seven days or less, versus industry norms of 30 to 60 days. I'm thrilled to say that we piloted this tool to score and successfully closed CNI and CRE loans that utilize this 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 routable network for 24-7 cross-border payment settlement on our cubic 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 non-interest bearing deposit growth since the launch of the tool. In the back office, we're using a gentic 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 screening, 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 in 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 are now AI-licensed up from 75% last quarter, and we're providing extensive training and support to our entire organization. And I'm personally leading a 40% and growing team today representing about 5% of our workforce focused on AI work flow transformation. How will this translate for 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 set 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 seven and Cubics. We've set for some time that excelling in payments is critical to future success in our industry. Let me first frame where our Cubics industry expansion stands. DA 24-7 settlement was our foundation. Then we moved to mortgage finance clients, and now real estate has become a fast growing vertical. To put it in perspective from what was essentially a startup vertical based on adoption and pipeline, we now project this vertical could represent 20% of all payment units. Capital markets is an opportunity ahead. 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 seven times. Spot deposit balances are up more than four times 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 cubics internal transfers, which is double 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 cubics to be a growth area in 2027, as these new verticals continue to scale with granular, diversified, low-cost deposits.

Turning to slide eight, 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, where the number one core EPS compounder and number two intangible book value per share compounder among our peers. And our organic growth deposit rate is roughly at two times 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 one-fifth of the entire franchise.

Let that sink in. In just 36 months, entirely, organically, we've built roughly one-fifth 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 percent range. We want to spotlight the 2025 vintage hired in the last 12 months. These teams already hold more than half a billion dollars 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 non-interest bearing at a spot cost of about 70 basis points. And similar to last quarter, the non-interest 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 three quarters. They run at roughly 1.7 times 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 or are in advanced discussions to join with four teams expected to join this quarter. These teams already have a nine-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 be going on slide 10. We're only showing you gap earnings this quarter, as we did not have any material adjustments to these gap 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 of 21.7 billion, an increase of 2.7 billion year over year. While total deposit growth for the quarter was more measured, this made us a lot of activity under the surface.

First, we continue to remix less strategic deposits of over $600 million in the quarter, picking up 150 basis points and bucking industry trends. Second, the quality continued to improve and I'll highlight a few stats. Non-interest 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 two years, we've increased our non-interest bearing deposit percentage from 25% to 29% to 32% of total deposits, top quartile among regional bank peers. Excluding our DA channel, non-interest 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 non-interest 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 non-interest 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% link 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 CNI 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 remaining discipline when structure and pricing. Slide 13 covers our non-interest income in 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 link 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. Nine interest 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 six months of 2026 our core efficiency ratio improved by approximately 200 basis points and revenue growth outpace expense growth generating roughly 430 basis points of positive operating leverage over the same period last year. Our non-interest 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 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 two. 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 two consecutive years of over 30 million dollars 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 two and a half times where we stood at the end of 2019 a Kager of roughly 15% compared to about a 5% Kager for regional bank peers over this 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 CET 1 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. When slide 19, credit quality remains stable across the board. Non-performing 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 from 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 and net interest income. When non-interest expense, we're maintaining our target even as we continue to invent significantly in people and technology. And lastly, on capital and taxes, we have no changes to our targets. Taking 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 its former core lending deposit onboarding and payments infrastructure. Our commercial payments platforms 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 non-interest bearing deposits hit another record. Our new teams added about $600 million so far this year and our second wave of 2026 teams should be starting the third quarter. Loans grew 17% year over year, and I 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 in technology.

With that, we'll now open up the line for questions.

Hey Steve, good morning. That is a 2027 goal. We sort of forecasted a little bit about, you know, operationally how we think about sort of units and, you know, in payments volume. So we do think that's sort of a medium term goal.

Yep. So I'm happy to take that, Steve. So really, I think you hit the nail on the head. You know, we are basically, I think, seeing a convergence of two of our top priorities. One is organic loaner deposit growth. So the teams that we're recruiting are bringing in 25 to 30 as high as sometimes 35% non-interest bearing deposits and operating accounts. And then our payments related commercial teams are bringing in almost exclusively non-interest bearing deposits. And hence, you're getting that over 50%. And that's really what's, what's driving this. And so we do continue to see this level of very high index non-interest bearing deposit growth coming from our commercial teams, which I think is a testament to our heads down focus and dedication to our priorities.

You know, 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 non-interest bearing majority of our loan growth is coming in about a 6%. So we'll see, you know, our interest bearing cost deposits did go down this quarter. We remixed, you know, about 600 million or so of higher cost funding, you know, which is happening under the level of the deposits. And we'll continue to hopefully see tailwinds, you know, in our margin in addition to NII growth, which we've always sort of set as paramount for us.

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

Good morning, 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, you know, what I would sort of say as it relates to your question about non-interest-bearing deposits and linking it back to QVX. You know, as you are aware, maybe sort of also referenced in some of your notes, you know, 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 QVX balances were roughly flat in the quarter, and that's really a testament to sort of the growth in the real estate payments vertical.

So, and, you know, I think I'd also just highlight that what's interesting about QVX is, you know, 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, you know, year over year. So, we continue to deepen and integrate, you know, with our customer base, you know, today.

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

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

Hey, good morning, Mike. Specifically, you know, as we talked about earlier in the year, we'd sort of migrated some of our mortgage fans customers onto QVX who were looking for sort of that operational, you know, payments left. Then we added new to the bank, you know, real estate customers. Those two in aggregate are about a billion dollars, you know, today. And we expect that we are hopeful our internal target is getting that to about a billion and a half by the end of the year.

So, you know, I think that, you know, we're really these aren't software plugins or we're, you know, we're actually building proprietary software and some of the larger lifts actually take quarters, not, you know, weeks. The tech that we're sort of dealing with that has really helped us work on transformational workflow automation is really only about six months old or so. So we're seeing productivity lifts today. That'll help us sort of think about, you know, 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, you know, run rate goal out there. And that kind of combines the two of those together.

That's right.

That's right.

Yeah, that's correct. Hi, this is Mark. Yeah, our balance is for the end of the second quarter track pretty closely to where we end of the first quarter.

Yeah, this is Mark. Again, the spot cost would be pretty close to where we ended the quarter on an average balance basis as well within a couple of basis points.

That is correct. It does seem at this point that the higher end of the range would be more likely.

Yeah, I would say it's been consistent with what we've saw in the last quarter, where depending on the vertical, you could be anywhere from 200 to 25 over so for the 300 over so for depending on the vertical.

You bet.

Yeah, that's right. I think when you look at now, you know, going in the third quarter, then you only need so for plus, you know, 250, 260 to kind of equal that, you know, or and then to go up from there.

Hey, Janet, good morning. You know, I think that I've said this, you know, publicly a number of times, I think we're very, very supportive of market structure and clarity from a regulation pun intended, you know, perspective. You know, while the Clarity Act, you know, sort of would require legislative approval in Washington, D. C. , I think the signaling that you've heard from other agencies, including the SEC and the CFTC, is that independent of, you know, whether the Clarity Act passes through Congress, that those agencies would be ready with proposed rulemaking and guidance that should hopefully provide structure. So I think that it either of those paths would be a net benefit to customers' bank existing customer base, but also open up new channels of potential, you know, verticals that are adjacent to our core DA 24-7 trading.

Yeah, I think, you know, obviously still a lot of levers on both sides of the balance sheet, they can impact that. I would say right now where the street is at, you know, feels like a good place to start.

Well, yeah, I mean, we don't usually talk about monthly results, but even with that, because a lot of the growth and the pipeline that we saw really came in the second half of the month, even if we would quote those kind of numbers, I think that's not really indicative of the optimism we see for the third quarter. You know, again, we just feel, you know, and I'll reiterate that we feel confident in saying that our third quarter NIM is going to be closer to our first quarter than interest margin. And in the pipelines that we see, plus the actual loan growth that we put on in the month of June gives us confidence for the commensurate NII growth as well.

Yeah, sure, Manuel, thanks for the question. I think that, you know, on the DA side, you rightfully, you know, have noted we have and continue, have continued to be, you know, conservative there and have said that we'll, you know, evaluate over time how we think about a conservative approach on, you know, some, maybe even minority deployment of cash, you know, and also rightfully so on the real estate side, you know, we, those are incredibly granular. I think there are just a couple hundred thousand, you know, dollars per account today, and traditional business lines that many commercial banks, you know, have with the extra sort of payments edge that we have. So we, we, you know, we will plan to be deploying those that sort of gets back to the, the, you know, the 6% NIM on those deposits that I sort of mentioned, you know, as we continue to grow.

And I think what's interesting is, is we're taking a portion of, while we saw a little bit of, of quarter decline on one side of that business, the other side the business saw an incredibly granular, you know, quarter over quarter increase.

Yeah. So I think that we're basically been flattish, you know, on the overall balances, you know, including the new verticals. And I think that, you know, the next quarter or two, I'll be able to sort of give some, some, you know, some more confidence. I think what you're saying, what you're hearing from us right now is we feel very confident that by the end of the year and the turn, you know, we should be able to get there. Maybe we get there a little bit sooner. But 2027 should be a growth year for cubic's, you know, related deposits.

Well, thank you, everyone, for your continued investment and support of customers' bank Corp. Have a great day and a great weekend. This concludes today's call. Thank you for attending. You may now disconnect.