Q2 2025 Customers Bancorp Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music. Hold, thank you for your patience.
Regina: Hello, and thank you for standing by. My name is Regina and I will be your conference operator today.
Speaker Change: At this time, I would like to welcome everyone to the customers Bank Corp 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 1 on your telephone keypad to withdraw. Your question, press star 1. 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.
Speaker Change: Thank you for joining us for the customer Bank, Court, earnings webcast for Q2 of 2025.
Speaker Change: The presentation deck, you will see. During today's webcast has been posted on the Investor's web page of the bank's website at customersbank.com
Speaker Change: You can scroll to Q2 255 results and click download presentation.
You can also Download a pdf of the full press release at this spot.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: From what is currently anticipated?
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Copies may be obtained from the SEC or by visiting, the investor relations section of our website.
J Sadhu: Now, at this time, it's my pleasure to introduce customers Bank Court. Chair J sadhu J.
Speaker Change: I'm joined this morning by our president and chief executive officer of the bank samsu and customers bankruptcy. Pho, Phil Watkins and customers Bank CFO Mark McCullum
Speaker Change: First until to welcome mark on the call. Mark and I were Partners at Southern Bank Corp and I'm thrilled. He is now on the customer's team.
Speaker Change: And you know Mark joined us in early June and will complete the transition to CFO of customers Bank. Corp. 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, Bank Corp over the past few quarters, he will continue to be a part of our top team.
Speaker Change: We are pleased to report another strong quarter reporting results that materially exceed the consensus Street estimates.
Speaker Change: 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 20 uh n. And then a year later, customers Bank, Corp all with an 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.
Speaker Change: 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.
Speaker Change: As you can see from slide 3 over the past 15 years, we built the differentiated model anchored in disciplined growth, Innovation and exceptional client service.
Speaker Change: And over the last 5 years, since samidu, joined the executive team, our transformation as meaningfully continue 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.
Speaker Change: 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 5 years.
Speaker Change: 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 5 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.
Speaker Change: 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.
Speaker Change: 6 years ago, the board of directors of customers Bank Corp and customers Bank embarked on its responsibilities for choosing a successor for our incredible CEO at that time dick East, who had expressed his desire to retire.
1 of the best decisions in my opinion, that dick and the board made at that time was to select and convince 1 of their fellow directors. Sam sadhu to join the bank as Chief Operating Officer in 2020,
Speaker Change: A year later upon Dick's retirement. Sam was named the CEO of the bank.
Speaker Change: 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 or pink and lead us into the future. We are all convinced that our best years are ahead of us.
Speaker Change: Been taken my short-term annual bonus completely in customers Bank corporate stock?
Speaker Change: Even our board receives majority of their compensation in Company stock.
Speaker Change: Our interests are totally aligned with their interests of our long-term shareholders.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Please join me in congratulating Sam. And with that, I'll turn the call over to Sam on slide 4.
Sam: Uh, good morning J. Uh, I want to begin by expressing my uh, deep gratitude to 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, uh, that Jay and his team have established since the bank's founding in 2009.
Sam: What makes this moment, especially meaningful, is this opportunity to lead alongside such an extraordinary team?
Sam: 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.
Sam: That entrepreneurial winning culture is what defines customers and it's what gives me tremendous confidence in our future.
Sam: While we're proud, and the progress we've made that you heard from Jay and the momentum that we're carrying we know the opportunity ahead is even larger.
Sam: We have the right foundation, a clear road map and an incredibly talented team.
Sam: And we're going to stay relentlessly focused on deepening client relationships, executing with discipline and delivering durable value for all of our stakeholders.
Sam: We are unwavering our belief that long-term success will be defined. In 3 things a client first approach, consistent financial performance and best-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.
Sam: These pillars are reinforced by our culture 1. That's been entrepreneurial client, Centric and performance-driven.
That's why we've been able to consistently attract and retain top talent.
Sam: 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 1 Financial performer in EPs and in Book value growth over the last 5 years.
And that's translated into long-term returns for our shareholders. We have also been as you heard from Jay, the number 1 performance, US Bank stock over a 5-year period.
Sam: Moving to slide 5.
Sam: Q2 was another very strong quarter.
Sam: A cross the board. Here's a quick look at the highlights.
Sam: We had nearly 300 million dollars in deposit growth from our new Commercial. Banking teams in what is typically a slow quarter.
Sam: We also delivered annualized loan growth of 8% with Diversified contributions across the franchise.
Sam: Our net interest margin expanded by 14 basis points, quarter over quarter.
Sam: our efficiency ratio improved again, even as we continue to invest,
And we continue to grow tangible Book, value Crossing 56 per share.
Sam: We accomplished all of this while maintaining strong credit quality and liquidity metrics.
Sam: Advancing the slide 6, you'll see our gaap financials.
Sam: And then moving to slide 7, 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.
Sam: We delivered core EPS of 180 cents with core Roe and Roa of 13.3 and 1.1 respectively.
Sam: This reflects broad-based strength across the business and more importantly our credit metrics remain strong, which Phil will cover in more detail later.
Phil Watkins: as you recall on our third quarter 2024 earnings call,
Phil Watkins: I stated that we could achieve 30% core EPS growth in 1 year if we executed in our strategic priorities.
Phil Watkins: I'm incredibly proud to say that we've exceeded that with about 35% of core EPS growth, from those levels, 1 quarter early
Phil Watkins: Now, let's turn to deposits in the next slide.
Phil Watkins: Where we continue to execute on our deposit transformation with a meaningful shift towards franchise, enhancing high-quality deposits.
Phil Watkins: 2023 contributed nearly million dollars in high quality quality deposits. This quarter.
Phil Watkins: These teams now, managed 2.4 billion dollars in relationship, based granular funding that's about 13% of our total deposits in less than 2 years which is absolutely phenomenal.
Phil Watkins: 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,
Phil Watkins: the planned reduction in deposit service by bmtx had an approximately 3 basis point impact, on total, average cost of deposits and approximately a 6 basis point impact on total interest-bearing costs
Phil Watkins: Deposit costs in the quarter.
Adjusting for this impact, interest-bearing deposit costs would have declined by 5 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 I've now reduced these balanced by balances by about a billion dollars over the last year.
Phil Watkins: Continuing to reduce these balances, remains a top priority for us.
Phil Watkins: Non-interest-bearing deposits remain strong at about 29% of total deposits.
Phil Watkins: At the heart of our deposit. Franchise transformation is 1 of the power, is 1 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.
Phil Watkins: 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.
Phil Watkins: I'm 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 customers Banks growth.
Phil Watkins: Year to date. We've onboarded 3 new teams to the bank and continue to recruit high-performing deposit focused teams.
Phil Watkins: 2 additional teams will be starting soon this quarter and we are an advanced negotiation with a few more.
Phil Watkins: Our brand reputation as a high-performance Tech forward institution with an entrepreneurial culture, is attracting more and more top. Tier bankers,
Phil Watkins: Those looking to leave behind bureaucratic Legacy institutions for a platform where they can serve clients more effectively.
Phil Watkins: Team recruitment is not a tactic for customers Bank. It is core to our strategy. It's how we win relationships. It's how we expand our franchise with purpose and its 1 of the clearest ways. We continue to create long-term value for our shareholders.
Phil Watkins: Now, turning to slide 9, I'd like to illuminate cubics our proprietary in-house developments platform.
Phil Watkins: Cubic is purpose-built for our institutional clients, who are looking for a tech forward service oriented and reliable banking partner.
Phil Watkins: Cubic has become a mission mission. Critical payments platform for our commercial clients. It's delivering value to our customers in 3 ways.
Phil Watkins: 247365 instant payment capabilities.
Phil Watkins: Continuous product enhancements, based on client feedback.
Phil Watkins: And a growing Network effect with thousands of unique pairs.
Phil Watkins: 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 24/7.
Phil Watkins: Providing a direct connection to all major exchanges. Stablecoin 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 1 and a half trillion dollars in payments volume.
Phil Watkins: If you ranked us against household, name payments networks, this would put us at number 3, only behind Amex and Visa commercial.
Phil Watkins: This very much aligns with our philosophy of being a top 3 to 5 player in franchise businesses, we participate in
Phil Watkins: 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.
Phil Watkins: Institutional adoption began significantly, increasing with ETF approvals last year and with stablecoin legislation. Now, coming out of Washington. We as a leading stablecoin infrastructure and digital asset payments provider believe will be the bank that benefits the most from this post genius landscape.
Phil Watkins: We are building a resilient compliance focused and scalable platform that is aligned with the long-term evolution of digital Finance 1 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.
Phil Watkins: Growth on slide 10.
Phil Watkins: 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.
Phil Watkins: Here's what's driving that performance?
Phil Watkins: Our corporate and specialized verticals continue to outperform.
Phil Watkins: Mortgage Finance was a nice contributor driven by our long-standing leadership in the space.
Phil Watkins: Fun Finance had a strong quarter and Healthcare. Lending is gaining solid momentum.
Phil Watkins: 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 on 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 segments. That gives us the flexibility to go where where the opportunity lies
Phil Watkins: 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 in 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.
Phil Watkins: In our net interest income, increased by about 6% to 176.7 million in the quarter.
Phil Watkins: On the assets 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.
Phil Watkins: And on the liability side, our interest expense was well-managed.
Phil Watkins: Thanks to our robust deposit and Loan pipelines were well, positioned to continue expanding net interest income.
Phil Watkins: 1 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.
Phil Watkins: The purchase closed in mid June. So there wasn't a significant benefit in 22 that we expect this to increase to about 10 million dollars in each of the next 2 quarters.
In short, we believe we've built a business that has positive drivers for lni and Nim on both sides of the balance sheet.
Moving on to slide 12, we'll cover non-interest expenses.
Phil Watkins: 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.
Phil Watkins: Even with this investment, our core efficiency ratio improved for the third consecutive quarter to 51.6%. 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 1.91% is top cortile of peers.
Phil Watkins: On slide 13, we'll talk about tangible Book value which we believe is 1 of the clearest markers of long-term shareholder value Creation in Bank stocks.
Phil Watkins: At the end of Q2 tangible book, value per share reached $56.24 and continues our multi-year trend of double digit annual growth.
Phil Watkins: 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.
Phil Watkins: 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.
Phil Watkins: As previously announced we fully redeemed, our Series, E preferred stock in the quarter. Utilizing a portion of our organically generated capital.
Phil Watkins: And at 12%, we remain in excess of our cet1 Target. Even while utilizing some of the space capital for loan growth, in the quarter,
Phil Watkins: On slide 15. We continue to be pleased overall with our credit performance non-performing assets, remain low, at 27 basis, points of total assets.
Phil Watkins: Our commercial and consumer portfolios are both performing. Well, you can see this is total. Net charge Ops improved down about 25%, quarter of a 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.
Sam: Thanks for that, Phil.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: On full year loan growth, we're raising the range to 8 to 11 percentage.
Speaker Change: We now project that interest income to grow between 7 to 10%.
Speaker Change: Up from 3 to 7 percent previously.
Speaker Change: This increased reflects a strong performance on both sides of the balance sheet and driving increased revenue, and the benefits still 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.
Speaker Change: I'd also like to Echo J sentiment, and thank Phil for his leadership.
Speaker Change: As customers, thank you for him to be spearheading strategic initiatives to support the company's long-term growth.
Speaker Change: In closing, we're building on a strong Foundation. 1 to find 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, I'd like to open up the line for questions, please.
Speaker Change: We will now begin the question and answer session in order.
Speaker Change: To ask a question.
Speaker Change: Press star followed by the number 1 on your telephone key.
Speaker Change: Our first question will come from the line of Peter winter with da Davidson. Please go ahead.
Speaker Change: Uh, good morning. Um
Peter Winter: Congratulations Sam uh, on the promotion and Jay. Um,
Speaker Change: Uh, with your future plans, uh, to start off. But if I could just
Uh, first question, just bill, you mentioned the increase of about 10 million. Uh, next 2 quarters, can you just go over that 1 more time?
Speaker Change: In your prepared remarks.
Yeah. Hey hey, good morning Peter. I hope you're doing well. Uh yeah. It's you know really it was a um small portfolio of loans. Uh that we originated with the partner. We had the opportunity to purchase out the interest at a discount and did. And so the results of that will flow through uh, net interest income over the next couple quarters.
Speaker Change: And it's it's 10 million benefit each quarter. Yeah, we over the next 10 million over the next 2 quarters, and we expect it to be around 10 million, each of the next 2 quarters.
Speaker Change: Got it. Thank you.
Speaker Change: And then Sam, if I could just ask, um, you know, just with this passage of of the genius act, just, how maybe are you thinking about crypto related deposits? Um,
Speaker Change: Coming forward and and just, you know, it seems like it's going to be incredibly competitive uh, with stable coins. I mean, we've seen JP Morgan step into this uh PNC announced uh a joint partnership uh, as well. So I'm just curious if you could talk about this
Speaker Change: What customers Banks. So, um, 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. Um, they they will likely benefit from more AUM today and in the future, it also is going to mean that there's going to be, you know, new new, um, institutional issuers, you know, starting with non-banks. Um as you can appreciate if you continue to pull this thread, all major institutional issuers, that launched a stable coin,
Speaker Change: Are likely going to need to be a customer of customers Bank. You know. We are the leading stablecoin infrastructure and payments provider, you know, in the country um, you know, and a little bit more on on cubic. I don't know if we've shared this before but you know, it's we only have about 10% or so of our deposits that come um from stablecoin issuers today, out of our you know, overall cubic's deposits.
Speaker Change: so we could very well see that increase over time, um, you know, and uh, 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
Speaker Change: You, you know, you have to, to be involved in if you have a large network of customers that need to move money. Whether if there's poll from your customers today, um, you will need to, uh, you know, have this as a means of, uh, of payment,
Speaker Change: But at the end of the day large Banks make money when there's friction and inefficient flow in the banking system, you know, whether that's FX payments Capital markets. Um and a stable coin, if it truly proves out to be um, more efficient cheaper faster, you really can advise in your existing Revenue. So there's a lot of pros and cons and a lot to be determined. I think this is going to be a long Runway over the medium to long term. But the most important thing is that is that this is going to be a huge benefit for customers Bank uh in the near to medium and long term. The pi is going to increase in regardless of uh, of increased competition. You know, we have the strongest payments Network. We, we, we laid out some of those stats there to kind of put that in perspective. Um, you know, we are continuing to Trend and grow that business, you know, July, as I mentioned, you know, was was will actually be, uh, our most active month to date on the platform.
Speaker Change: That's helpful and just 1 1 last uh, quick question. Just the professional fees. Uh, increased 2 million this quarter quarter to quarter. Could you just talk about that and maybe the Outlook?
Peter Winter: Yeah. Hey hey, Peter, good morning again. Um, yeah, you know I I'd say generally um,
Peter Winter: The, if you look back, they were actually pretty consistent with where they were sort of 2 quarters ago. So, you know, q1 was probably a bit lower. We actually saw, um, some, you know, some increases kind of broadly across the, um, you know, across the platform. Uh, but from the risk management sort of investment side. They were they were largely consistent, quarter over quarter.
Peter Winter: 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 prior, you know, prior guided towards and expect those really, uh, that portion, which is not contributing to the growth of this quarter but that portion uh, you know, to uh, you know, to drop off uh significantly if if not completely in the next 90 days.
Speaker Change: Got it. Thanks Sam. Thanks Phil.
Our next question comes from the line of Kelly Ma with KBW. Please go ahead.
Kelly Ma: Hi, good morning, thanks for the question. Um, I would like to continue on with the topic of cubics, um, notably I think investors are interested as to, how big of a contributor this, this could be to your business, I know, um, you had previously capped these deposits at 15% of total, um, which has been lifted a bit. Um, can you 1 provide how what the size of the Cubix deposits were this quarter and 2 just from a high level as you think about the potential opportunity as well as, you know, risk management and thinking through concentrations, is there a way to think about a
How how your this business could grow with the industry? Just um,
Kelly Ma: Any any high level thoughts there?
Kelly Ma: Good morning. Kelly. Happy.
Kelly Ma: Happy to take that. So
Kelly Ma: Of July, we've had the the most active month, uh, you know, on, on cubics to date. So would still, you know, almost a week to go, uh, you know, in the month, our deposit balances are up about 20%, uh, you know, in the, in the month of July, to kind of put that perspective increased activity leads to increased deposits, um uh and increased deposits leads to to higher interest income, um, as well as uh, you know, increased activity which leads to to fee income. So, over time, uh, we uh, expect that, uh, you know, these, uh, deposit, balances will, uh, could potentially, you know, increase as we get more institutional flow, I think, 1 of the things that's not fully understood and appreciated, is we have about 20% of our flow today, which was not the case 2 years ago.
Kelly Ma: Comes from traditional Finance players, uh, who are active in, uh, in uh, in the, uh, digital asset trading and settlement space, uh, and we expect that percentage to increase over time. And as that percentage increases over time, we may see increased, um, 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, that'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, um, you know, um, you know, modest, uh, um, you know, deposit growth as activity increases. Um, so hopefully that answers your question but happy to answer any follow-ups.
That that's really helpful I guess um as a follow-up here um as as you mentioned several times, now you you hold these deposits in cash. I think some larger players are considering lending against such um, related deposits.
Speaker Change: given the softening regulate regulatory tone in the industry is this is this something that's coming up with discussions on the board and any change in terms of how how you're viewing it potentially longer term with regards to, um,
Kelly Ma: How you hold these deposits?
Speaker Change: Sure. So uh the the short answer is we're we're not, you know, looking to change, you know, the way that we approach and, and, and hold on these deposits. I think that the, the, you know, longer answer is over time as you can probably appreciate over a multi-year period, we'll continue to get more, um, you know, more internal, uh, you know, data on how these, you know, deposits, uh, operate and fluctuate. We'll continue to have longer term relationships with our customers and can work on structure. Uh, uh, and, uh, and you just have a sense of sort of a minimum amount of payments flowed. So, um, the the answer over the medium term is is that we will likely, you know, consider um, you know, but this will be customer driven and it'll be business driven. Um and sitting where we are today. Uh it uh, it is entirely appropriate to hold these in cash, especially where, where rates are
Speaker Change: Got it. Um, May maybe last question for me and then I'll step step back into the queue is, you know, this slide 9, where you, um, Drive the, the payment volume is is super powerful. Um, I know this is, you know, a huge benefit of of this platform is is the payments related, uh, fee income potentially generated? Can you, um, elaborate, how, how much that contributed to QQ and, um, any commentary about, uh, the potential for further monetization of payment fees, longer term,
Kelly Ma: Yep.
Speaker Change: So, uh, late last year, we, you know, we instituted sort of traditional, um, you know, why our fees and platform fees to, to some of our customers, uh, that has resulted in about an 8 million dollar run rate of fees. It was about similar in the second quarter. Um, so nothing, you know, necessarily, uh, you know, uh, material, uh, in the second quarter. But going forward, we could see that increase over time again, our objective is not to to continue to, uh, you know, uh, materially Drive fees our, our majority of our income today is coming from interest income over time. We will likely see that shift uh, from a mixed perspective, especially as there's a potentially, you know, changing rate environment over the medium term. Um, so, uh, you know, 1 of the things that's, uh, that is important about that overall volume. Is it really just shows the Incredible strength of the network and, you know, while it was 1 and a half trillion last year? Um, you know, we're at about a trillion, uh,
Kelly Ma: 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 in our, in our lead, and our moat, uh, is increasing.
Kelly Ma: Got it. Thank you for so much. For all the color. I'll step back.
Speaker Change: Our next question comes from the line of Harold, G with Riley Securities. Please go ahead.
Harold G: Hey, thank you. Congratulations. For all the changes and
And the leadership there. I hope you all succeed and happy with where things are heading to. My question is still on the um,
Harold G: And you know the payment flows across the rails are just enormous, the monetization, is it, you know, it it it's quite low. I mean I guess it's this really a vehicle outside of even digital apps is just
Harold G: To increase banking relationships and, and the size of connections to many commercial accounts because it seems like, you know, I I appreciate your comment on, you know, how Banks big Banks make money. They make it through friction and this seems to be very low. Almost a low cost producer, uh or a low cost option. And and and and and and because of that, you know, volume is coming your way. Could you just kind of comment on on your strategy with your current pricing and and, and the related volume gains you're getting
Yeah. Uh, good morning. How happy happy to take that? So uh, you know, as we, you know, think about the um,
You know, the the cubic, you know platform, it's 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, you know, existing, you know, core and and payments infrastructure at the bank and allows our customers commercial customers, uh, who are more institutional and, and in many cases tech-savvy, you know, to to operate. So, you know, prior to cubic, we had something called cbit, which was a blockchain, you know, tokenized deposit, you know, from a traditional Finance perspective. Um, 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. Um, when you're talking about the digital deposit sort of format,
Harold G: That we're using today, 24/7 through 65 along with a ton of other additional. Not just, you know, intra Bank type transfers, but but really, a full Suite of products, and payment, rails, and services and connectivity, and data, and information. Um, you know, we are seeing, you know, you know, tremendous amount of use cases, uh, you know, from commercial customers. I was just sitting in someone's office yesterday and we have, uh, you know, a real estate customer who has hundreds of accounts with us that now going to be using this, uh, for some of their internal, you know, GL Ledger type, um, uh, activity. And again, this is not necessarily driving, you know, new deposits with that customer. Um, but it is actually, uh, strengthening our relationship. It's providing an incremental service, um, and, uh, 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 a, as an opportunity to, um, to to strengthen relationships Drive incremental, deposits with our existing customer, but also importantly, open up, you know, more traditional, F Finance type.
Uh you know uh you know opportunities that you know, many of the big banks have these types of capabilities but on a 1-off basis in a very clunky basis and an inability to do it in the um you know incredibly streamlined format that we have.
Harold G: Thank you very much.
Our next question comes from the line of David. Bishop with Hub day group, please go ahead.
David Bishop: Yeah, good morning. Uh
David Bishop: hey, a quick question, uh, Sam in terms of uh,
David Bishop: The loan mix here. Um, you guys have been pretty successful past, couple quarters and growing commercial real estate. Maybe taking some Cher, giving your capacity, just curious your appetite to to grow some of this commercial real estate segments. And as we look at the loan, mix,
In terms of the breakdown, for segments, does that stay relatively consistent? Do you think over the next year or do you continue to see, you know, sort of specialty lending seen on a a bill that is a percent of low? Thanks.
Phil Watkins: Yeah. Hey Dave, good morning. It's Phil. I I'll take that for you. I mean, I think yeah. We've we've talked about over the last 2 or 3 quarters. We you know somewhat opportunistically stepped into a bit of a void especially here in our New York markets uh or in the Northeast markets in in commercial real estate, you know, as others pulled back and in Q4 and q1, you know, we were really able to win again, not transactional, but full relationship based opportunities where we, you know, we're able to perform for clients when when others weren't
Phil Watkins: You to do that. Um and go where we see the best opportunities for that franchise enhancing growth. So yeah, we we can give you the lookout of the pipeline, you know, call it, you know, 90 days out which does have some some commercial real estate. But also some again, continued contributions from the specialized cni. But as we look, you know, 3 4 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 mentioned, you know, we have about, you know, 500 million dollars or so in the, you know, the loan backlog, you know, right now.
Got it, I appreciate that guidance there. And then, uh, just curious in terms of the BMT deposit to run off is there any more uh, plans in the near future? Will that be a headwind or is that mostly behind you? Thanks.
Phil Watkins: I think we uh well telegraphed that that was uh Q2 headwind and it and anything like it is behind us.
Great. Thank you.
Speaker Change: Our next question comes from the line of Steve Moss with Raymond James, please go ahead.
Uh, good morning, guys.
And uh, Sam congratulations on the promotion here.
Maybe just on the deposit side. Um, with you know, the pipeline remaining strong, there, just curious. You know, if you know what 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 your brain on these days and, and just kind of where is, you know, what's the Blended cost of deposits today?
Yep. So I think, um, uh the the the good news is, is that, you know, we're we're continuing to bring on, you know, new deposit customers at some level. So we were sort of sort of high 20s 30%, non-interest bearing, uh, you know, component blending in about that 2 and a half percent plus or minus, you know, type basis, which we feel, you know, pretty, uh, you know, privileged to be doing and then a lot of that credit goes to, you know, our our existing and, as well as sort of knew, you know, teams to the bank as well as feature teams to the bank. Um, you know, when you're when you're in competition and taking market, share in some cases, you have to sort of match, uh, you know, the top dollar as rates, uh, you know, decline, uh, you know, a uh, a receding tide, sort of, you know, uh, brings all boats down and I think that many of those conversations are, are had and expected. Uh, you know, by customers, especially when it's not connected with, you know, a migration of an account.
Speaker Change: Okay, appreciate that. And and just in terms of the teams, you hired here, same. And the ones you're about to bring on, just kind of curious if you could size up, um, the potential, uh, those deposit books,
Speaker Change: Uh, I don't want to get premature in sizing up the deposit books, but what I would say is that, uh, uh, 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 in discussions with, you know, um, you know, 5 already, you know, 3 on on boarded to, you know, this quarter and and you know, another 1 or 2 plus or minus even even more um you know, the the goal would be to start building for for 26 and 27. Um, you know, 1 of the things that's worth mentioning about our prior teams. Uh, as a reminder, they were Break Even uh, in the first half of this year, call that a 100% efficiency ratio, right?
Speaker Change: So, uh, there's a lot of opportunity for that to come down. Uh, you know, first by uh, you know, having, uh, you know, the, the revenues be 2, times expenses, eventually would like to get that to a minimum of 3 and that's going to provide us a tremendous amount of operating leverage, you know, over the next 12 to 24 months on the, on the, on the um, old teams on new teams. We're consider. You know, we're we're working on a similar 12 to 18 month type, uh, you know, break even, um, and uh, you know, safe to to say, you know, each 1 of our teams, you know. Uh, we would expect to be at a minimum and sort of that couple hundred million dollars or so, uh, you know, book on the high end, they, they, they do get to 10 figure.
Speaker Change: Okay, appreciate that. And in terms of, you know, I know you guys have gotten to knee growth. Um, but just curious how you guys are thinking about the margin here. I realize there's a lot of moving pieces, but, um, is it relative stability to that current levels or, you know, could we see some more margin expansion, just given, um, your deposit issue continue to get better here?
Speaker Change: over the last year plus to, um,
Speaker Change: To uh, continue to, to bring that closer to to neutral. So I'd say, overall, on a net basis, we we probably have a little bit of a, an upward bias, but it, it will be a bit dependent on that Outlook. Uh, I guess the 1 thing I would highlight as I, as I noted earlier, we, you will see, you know, clearly some benefits in in Q3 and Q4 uh, from that um, additional interest income flowing through
Speaker Change: It right. Okay.
Speaker Change: thanks for that Phil and then I guess, just maybe
Speaker Change: I hear you guys in terms of,
you know, it could be bringing on more um customers with regard to cubics and, you know, definitely a potential for
Speaker Change: Loan growth, uh, deposit growth out of that, out of the platform, you know?
Speaker Change: in terms of I, I realize the size is kind of difficult to see where it could shake out, but just kind of curious as to, you know,
Speaker Change: How you're thinking about managing those deposit balances? Um, or are you just willing to to let it ramp up and and uh, you know how how do I think about concentration with regard to that and if if you guys have any thoughts
Speaker Change: Um, over the medium term.
Speaker Change: It's it's a very valid question Steve and 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 1 vertical. And so, you know, these are conversations that we're having and that we're thinking about and and uh and that's why, you know, I've stated before our our goal is not to to sit here and drive, you know, deposits its 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.
Speaker Change: Right. Okay.
Speaker Change: Well, I appreciate all the call here today and thank you very much.
Thanks Stephen. And what I would like to say to, you know, is I forgot to say at the beginning? Congratulations on the new baby.
Speaker Change: Thanks Sam.
Speaker Change: Our final question comes from the line of Matthew Breeze with Stevens. Please go ahead.
Matthew Breeze: Hey, good morning.
Matthew Breeze: Um, I had a few questions. Uh, 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?
Matthew Breeze: Yeah, hey, hey, Matt, good morning. Um, you know, I'd say overall we probably feel, you know, pretty good about where our security portfolio is a percent of approach 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. Um, but you know, at this point it would probably be, you know, be more, uh, be more cash flow driven and then, you know, as far as balance sheet from a balance sheet, growth perspective, excuse me, as I said, I, you know, as we've said before, you know, we the first half of this year, we would continue to expect to be heavier on the deposit remix side. And um and so as a result, you know, you wouldn't see a lot of balance sheet growth uh which is which is what our current. But then as we got into the back half of the year and certainly into 20, uh, 6, you know, while we still have, you know, some some opportunities on the remix side, we would expect more growth uh, in 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 to total asset growth at this point. That's a fair statement. That that's right.
Speaker Change: And then, um, in the presentation and 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.
Speaker Change: For the call report last quarter. I, I thought you had around 6.6 billion brokerage is it, is it fair to take those 2 numbers and and figure out the, the net number or or what is your broker? Deposit, balances today. Um, and is there a Target of gold there? Where, where would you like to be broker deposit total deposits?
Speaker Change: Yep.
Speaker Change: Higher range of of, of a Traditional Bank, you know, whether that's, uh, you know, 25 or, uh, or 20, it's to be determined. We definitely want these below 30% in the near to medium term.
Speaker Change: Thank you. Okay. And then, I had a couple questions on on cubic myself. I, I guess the, the first 1
Speaker Change: Is is just on the stable coin bill and I was hoping you could help me better understand, you know, 1 of the inherent things is that all stable coins will need to be backed by us treasuries, which inherently invites.
Speaker Change: Global uses and I and I think there's some strong UK use use cases around that, but
You know, for yourselves and others in the banking system.
Speaker Change: How do you protect yourself from a BSA? AML know, your customers 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 US US borders,
Yep. So, you know, I think that, uh, it from first and foremost, I think I mentioned this earlier in the call, it is incredibly helpful to have, uh, you know, our customers coming customers come into, you know, formal Federal regulatory, you know framework, uh, 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. Uh, this provides, you know, sort of a very, you know, constructive and and cohesive roadmap. Not only on the, uh, you know, compliance side BSA AML but also, you know, importantly, on sort of
Speaker Change: Of the liquidity management and and sort of the consumer protection as you were sort of referencing, you know, before, uh, you know, there's about a plus, or minus 18 months, implementation phase where a lot of, uh, detail, you know, will be, uh, you know, will be coming out, you know, for a number of our, uh, you know, uh, customers. As I mentioned, this is about 10% plus or minus of our existing, you know, deposits today. Um, and uh, we're, 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, and we'll look to really just partner, um, you know, with, uh, with the structure that our customers are in and and what we're looking to do at customers Bank on the BSA AML side, as we've already invested significant sums of money. You know to build up our our infrastructure and our technology and we view it as a strength of the organization and the fact that our customers are 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 but also really increase the motor on our business.
Speaker Change: And you said stablecoin is 10% of existing deposits. Is that total deposits or just the um the cubits deposits?
Speaker Change: Cubics deposits.
Speaker Change: Okay, okay.
Um, and then the other thing I was curious about is just in terms of your cubic customers, you know? Could you talk a little bit about
Speaker Change: The granularity of those deposits. And how many accounts, you know, you know, are frequent users of cubics. I I just wanted to get a sense for, you know, is this is this kind of a, you know, an upside down pyramid where there's there's a small number of, of really big kind of
Speaker Change: Deposit holders or is it pretty granular for us? The board, you know frame for us what kind of you know customers are actually within your system?
Speaker Change: Yeah. So you know we have essentially all major exchanges. All major stable coin providers all major market makers all major investors. You know, digital assets specific as well as traditional institutional investors, you know who who operate in the digital asset space. So so really, you know, it is a, a wide swath of market share. And, and, and really the folks at bank with us come to us for the payments network, uh, you know, first and foremost. And that's really where our Focus has been. So, the, the short answer to your question is is everyone is, uh, is, uh, is looking to be active on the network and, and, and that's also why they're, you know, customers of the bank. The longer answer is is that as you can appreciate, uh, the larger, the exchange, the larger, the AUM of the stablecoin provider and the uh, you know, larger the network. Even when someone is new to the bank, it takes time for them to build a larger Network. Um, you know,
Speaker Change: they, they do build, you know, in many cases larger activity, which which comes from, you know, larger, deposit, balances, and the deposit balances are, you know, Diversified across those major, you know, thresholds, but you will see, you know, say, uh, you know, a 9-figure deposit with an exchange and you will see maybe a 5 million dollar deposit, uh, you know, with, uh, you know, a medium-sized investor
I'll leave it there. Thanks for taking my question. Sam. Appreciate it.
Speaker Change: And that will conclude our question and answer session. I will hand the call back over to Sam to do for any closing remarks.
Sam: 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.
Sam: This concludes today's call, thank you all for joining. You may now disconnect