Customers Bancorp, Inc.CUBINYSE
LOADING
|||
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Customers Bancorp, Inc. Third Quarter 2025 Earnings Webcast and Conference Call [Operator Instructions] I would now like to turn the conference over to Philip Watkins, Executive Vice President, Head of Corporate Development and Investor Relations. Please go ahead.
Philip Watkins: Thank you, Regina, and good morning, everyone. Thank you for joining us for the Customers Bancorp's earnings webcast for the third quarter of 2025. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking statements under applicable securities laws. These forward-looking statements are subject to change and involve a number of risks and uncertainties that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our 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 turn the call over to Customers Bancorp Chair, Jay Sidhu. Jay?
Jay Sidhu: Thanks, Phil, and good morning, ladies and gentlemen, and welcome to Customers Bancorp's Third Quarter 2025 Earnings Call. I'm joined this morning by our President and CEO of the bank, Sam Sidhu; and Customers Bank and Customers Bancorp's CFO, Mark McCollom. We are very pleased to report another strong quarter. Once again, our results materially exceeded expectations. We experienced deposit-led growth in our balance sheet of more than $1.5 billion over the quarter, delivered positive operating leverage and strengthened our already robust capital levels through a very successful common equity offering that was oversubscribed by about 10x. That speaks volumes about investor confidence in our franchise. We also delivered top-tier earnings performance, continued to improve capital quality and drove disciplined franchise-enhancing growth across deposits, loans and also fee income. You'll hear more from Sam and Mark on those results in a moment. It is exactly these sorts of financial results that gave me the confidence last quarter to announce my transition to Executive Chairman beginning in 2026 and for Sam to be named Chief Executive Officer of the holding company besides being the CEO of the bank. From this seat, the Board of Directors and I will continue to provide all the guidance to Sam and our awesome management team to ensure customers continues to build on its trajectory of growth, consistency, full transparency, resilience and delivering the results to you on a regular consistent basis. From a financial perspective, customers has been an industry-leading EPS and book value compounder over the last 5 years for banks of our size, and that's translated into long-term results for our shareholders as we've been the #1 performing bank stock in the United States for institutions over $10 billion in assets over a 5-year period. Thank you for -- and kudos to all of you for being our long-term shareholders, and I'm thrilled to be one of them. Our mission remains unchanged to deliver long-term and consistent value for our shareholders and our communities by putting clients first and executing with excellence. The numbers you see are the result of our leadership team executing superbly on our unique strategy of single point of contact banking with the strongest risk management principles. Before we dive into the quarter, I'd like to take a moment to welcome Janet Lee and the TD Cowen team to coverage of Customers Bancorp. It's terrific to have you and Steve following our story. We appreciate your interest and look forward to your insights as we continue to execute on our strategy. With that, I'm going to turn it over to Sam to discuss in detail the quarter with you. Sam?
Samvir Sidhu: Thank you, Jay, and good morning, everyone. This quarter was yet another clear demonstration of the strength of Customers Bank's diversified model. Across the franchise, we delivered strong performance, disciplined growth and continued transformation of our deposit base. We are firing on all cylinders, and our team is performing at an elite level. Q3 results represented another quarter of very strong financial performance. Here are a few of the highlights. We generated $1.4 billion of deposit growth, led by our new commercial banking teams and cubiX clients. Our loan growth was 6% quarter-over-quarter with diversified contributions across multiple verticals. Our net interest margin expanded meaningfully by 19 basis points quarter-over-quarter, and our net interest income increased by 14% in the quarter. Our efficiency ratio improved again even as we continue to invest in new teams, technology and risk management. As you heard from Jay, we had a tremendously successful common stock offering in early September, which was about 10x oversubscribed. The equity raise even further improved our capital quality and ratios meaningfully. And we compounded tangible book value at a 25% annualized pace in the quarter to nearly $60 per share, continuing our multiyear trend of 15% annualized growth, which is #1 for banks $20 billion to $100 billion in assets. We accomplished all of this while maintaining strong credit performance and ample liquidity. Advancing to the next slide, you'll see our GAAP financials. And moving to Slide 6, I'll run through the core financial highlights for the quarter. Our beat relative to consensus expectations on both a GAAP and core basis was driven by strong results across the franchise. We delivered core EPS of $2.20 with a core ROE and ROA of 15.5% and 1.25%, respectively, both important profitability milestones. This reflects solid growth on both sides of the balance sheet, resulting in total revenues of $232 million, which was up 12% in the quarter. And our credit metrics also remained strong, which Mark will cover in more detail. Our third quarter EPS grew by 22% in the quarter, which is on top of the 17% growth last quarter. As you may recall, a year ago, on our third quarter call, I said that we'd look to grow our core EPS by 30% or more this year. I'm incredibly pleased to say that we more than doubled that, up 64% from the same period a year ago. And we believe that our $24 billion balance sheet is stronger than ever with very robust capital ratios, strong credit quality and reserves and ample liquidity to support our growing pipelines. Now let's turn to deposits on Slide 7, where we continue to execute in our deposit transformation with a meaningful shift towards franchise-enhancing granular high-quality deposits. As I mentioned, total deposits grew $1.4 billion in the quarter, ending at $20.4 billion. This included an increase of $900 million in noninterest-bearing deposits, which was led by growth from existing institutional customers on our in-house developed cubiX platform. Our deposit growth was supported by several other areas, including our new banking teams onboarded since June of 2023, contributing nearly $350 million in high-quality deposits this quarter. These teams now manage approximately $2.8 billion in relationship-based granular funding, which is about 14% of our total deposits in just 2 years, which is akin to buying a $3 billion bank, but without the tangible book value dilution and integration risk of traditional bank M&A. The $900 million of growth in noninterest-bearing deposits led to a record $6.4 billion in noninterest-bearing deposit balances. In addition to cubiX growth, our core commercial franchise again delivered 9 figures of noninterest-bearing growth, which is truly incredible. As a result, noninterest-bearing deposits now represent about 31% of our total deposits at quarter end, placing us #1 amongst our peers. Our team responded well to the Fed easing in September, and we were able to lower our deposit cost by 15 basis points post Fed action, which represents a deposit beta of approximately 59%. As a result of the combination of these 2 factors, our total average cost of deposits declined 8 basis points in the quarter. And to emphasize this point further, our spot cost of deposits was another 9 basis points lower at 2.68% at quarter end or 17 basis points below our Q2 average. Now let's turn to Slide 8, where I'll provide more detail on the incredible success of our deposit transformation. We've talked a lot about our deposit gathering efforts on our calls in recent quarters, but we thought it would be helpful to look back and highlight just how much we have transformed our franchise over the past few years. In less than 3 years, we have onboarded nearly $7 billion in deposits from our new banking teams and cubiX clients. That represents nearly 40% of our deposit base at year-end of '22 and about 1/3 of our deposits today. And it's the quality of the transformation that really shines. The growth is very granular with nearly 8,000 accounts helping us to drive over 50% growth in our commercial client base. Incredibly, they are very low cost at just 1.06%. This has allowed us to increase our noninterest-bearing deposits to 31%, as I mentioned, from 10%, while simultaneously reducing our wholesale CDs from -- down from 22% to 9%. Our average cost of deposits this quarter was essentially flat relative to the end of 2022. Over that time period, interest rates are 65 basis points higher on average today than they were at the end of '22. The industry's deposit costs, however, are 128 basis points higher, which means that our outperformance is incredibly 124 basis points over that time period compared to peers. That shows the power of our deposit transformation. Moving to Slide 9. Central to our success has been our ability to consistently recruit top talent. In the first quarter of this year, we highlighted the exceptional results from the teams who joined us in 2023 and 2024. And we also outlined a road map for the types of continued team recruitment we look to execute on in 2025. This included top-performing bankers to deepen our geographic presence and continue to enhance our national specialized deposit verticals. We had shared we would add at least 2 new teams this quarter. In fact, we were able to recruit and onboard 4 new teams in the quarter. This included 2 additional geographic C&I teams as well as 2 national teams, 1 serving title companies and 1 in the sports and entertainment segment. This brings our 2025 total to 7 deposit-focused teams with approximately 30 new team members. Our brand reputation as a high-performance tech-forward bank continues to attract top-tier talent. The flywheel is turning, and we have incredible tailwinds both from continuing to scale the portfolios of the teams that join us in '23 and '24 and now significant additional opportunities from the teams that have joined us this year in 2025. It is important to highlight that in almost every one of the bankers that have joined us have come through direct referrals from our existing team members. We'll look to continue to add to the roster of new teams each quarter. Let's turn to loan growth on Slide 10. Loans grew approximately $900 million or 6% quarter-over-quarter. Growth was broad-based and relationship-driven led by fund finance, commercial real estate and venture banking. Our new commercial banking teams also contributed to loan growth while maintaining strong deposit-led economics. The portfolio remains diversified, and we continue to prioritize credit discipline and pricing. Given the depth and breadth of our platform, we continue to see opportunities to add franchise-enhancing loans with an utmost focus on credit discipline. With that, I'll turn the call over to Mark on Slide 11.
Mark McCollom: Great. Thanks, Sam, and good morning, everyone. Thanks for joining us on the call. I'm going to start with our net interest margin, where we reported strong results. Net interest margin expanded by 19 basis points this quarter to 3.46%, marking the fourth consecutive quarter of improvement. Our net interest income increased by about 14% to $202 million for the quarter. As we noted last quarter, we did have a positive impact from loan accretion on a small pool of participated loans we repurchased at a significant discount last quarter. This added $10 million to net interest income this quarter compared to the second quarter. This net interest income benefit will repeat again in the fourth quarter of 2025 and then is expected to drop off in the first quarter of 2026. However, when excluding this $10 million from our third quarter results, our net interest income still increased 9% sequentially due to the following core trends. We had an increase in average deposits of over $1.4 billion at a blended cost of 2.77% for the quarter compared to 2.85% last quarter with nearly $800 million of higher average noninterest-bearing balances. We also had an increase to average loan balances of $630 million. And lastly, our overall funding needs declined as a result of the $163 million of net proceeds we received from our common equity offering in September. As Sam noted, our team responded well to the first Fed funds rate cut. Within a week of that cut, our interest-bearing deposits had declined by 15 basis points on a spot basis or a beta of almost 60% early on. We also executed off-balance sheet strategies during the quarter, layering on $800 million in notional value of received fixed swaps on the asset side of the balance sheet in order to further neutralize our asset sensitivity. While we remain modestly asset sensitive, we think we have well positioned the bank to produce solid net interest income growth in future periods regardless of macro monetary policy. Moving on to Slide 12. Our noninterest expenses declined $1.4 million to $105.2 million, while we continue to invest in people, technology and risk infrastructure. Compensation and occupancy were the categories that increased during the quarter with reductions in our FDIC assessments and professional fees driving the bulk of the decrease. Importantly, our efficiency ratio improved again now at 45.4%, placing us firmly among the top quartile of peers even as we continue to invest in this growth. And lastly, when just focusing on expenses, our noninterest expense to average asset ratio declined to 1.74%, which rates the best within our regional bank peer group. On Slide 13, tangible book value per share grew to $59.72, up 6.2% sequentially or 25% annualized. We believe this represents one of the clearest markers of long-term shareholder value creation and continues our multiyear track record of double-digit tangible book value growth. Now let's move to Slide 14 to discuss capital. We significantly strengthened our capital position this quarter. Our successful common equity raise provided $163 million of net proceeds. Through the combination of this capital raise, strong quarterly earnings and reductions in our AOCI, which is currently at a loss position, our shareholders' equity grew $263 million, which is 14% sequentially. As a result of this growth, our common equity Tier 1 ratio improved 100 basis points to 13% and tangible common equity grew 50 basis points to 8.4%, and this was even after supporting more than $1.7 billion of balance sheet growth during the period. On Slide 15, our credit performance remains stable and well managed. A strong credit culture has always been a critical success factor of customers and the results bear this out, as you can see from our metrics. Our nonperforming assets were just 25 basis points of total assets and have been consistently below peers for each of the 5 quarters shown. Excluding our small consumer loan portfolio, net charge-offs for commercial loans remained very low at 16 basis points annualized. Additionally, special mention and substandard loans were down about $14 million or about a 3% decline during the quarter. Overall, we believe the loan portfolio is well positioned, and we have strong reserve coverage within our allowance for credit loss. Currently, this allowance sits at 103 basis points and represents 534% coverage of our nonperforming loans. Moving to Slide 16. As a result of the strong quarter and emerging clarity on the remainder of the year, we are revising several of our guidance items for 2025. For deposits, we are increasing the full year growth range to 8% to 10% for the year, up from 5% to 9% given the momentum we experienced during the quarter. For loans, we are increasing full year growth to 13% to 14%, up from 8% to 11% previously. I would note that we had a very strong third quarter, which did pull forward some closings from the fourth quarter, which is why we may see less growth next quarter. But we still feel very good about our ability to deliver above-industry average loan growth with a disciplined and credit-first mindset as we head into 2026. We are now projecting our net interest income to grow between 13% and 15% for the year, up from 7% to 10% previously. This reflects the strong performance on both sides of the balance sheet in driving increased revenue as well as the margin benefits I discussed earlier. For efficiency, as a result of the stronger revenue growth and well-managed expenses, we now believe our efficiency ratio will be below 50% for the year versus 56% in 2024. As a result of our common stock offering, our CET1 ratio is now projected to be around 13% at the end of 2025, consistent with third quarter levels. And with that, I'll now pass the call back to Sam for closing remarks before we open up the line for your Q&A.
Samvir Sidhu: Thanks, Mark. In closing, Customers Bank is delivering on its strategy, disciplined deposit transformation, diversified loan growth, efficiency improvements and a strong capital, credit and risk management. We increased deposits by $1.4 billion with most of the growth coming from noninterest-bearing deposits. Our noninterest-bearing deposits now stand at 31%, which is #1 of our peers. We grew our loan portfolio with franchise-enhancing relationships. We improved our net interest margin for the fourth consecutive quarter, improved our efficiency ratio for the fourth consecutive quarter, delivered a 1.25% ROA, delivered a more than 15% ROE, increased our TCE ratio by 50 basis points to 8.4%, all while maintaining excellent credit performance. Our tangible book value has grown at 15% over the last 5 years, #1 in the industry for banks of our size. Importantly, our loan, deposit and team recruitment pipelines are strong, and that is why we're incredibly excited about the prospects for this company to close the year and excel in 2026 and beyond. Operator, we'll now open the line for questions.
Operator: [Operator Instructions] Our first question will come from the line of Janet Lee with TD Cowen.
Sun Young Lee: On the deposits, so if I were to look at -- obviously, you guys have been bringing in a lot of about $200 million to $350 million of lower cost deposits from the new banking team hires. If I were to look at 2026, should we expect the pace of deposit growth from the new banking team hires to continue around this pace? Or is that contemplating also the pace of new banking team hires is maintained in that like 4 teams higher per quarter range. Just want to get some color around the pace of deposit growth, how that could move versus what we saw in this quarter as we're reaching the saturation point from the big banking team hires that you guys made in 2024?
Samvir Sidhu: Sure. Well, Janet, thank you so much for that question. So to add a little bit of color, you rightfully sort of mentioned that we had sort of guided previously to about $300 million to $400 million or so of quarterly deposit growth from the new teams, which we, this quarter roughly achieved. Sometimes we're a little lower, sometimes we're a little higher, but we're kind of in that type of target. We would expect that pace to continue in 2026 based upon the '23 and '24 teams. The 25 teams are really going to start adding balances in the sort of end of the first half to the middle of next year and really ramp up. We expect over the course of the year, that should give us about a 25% lift on that $300 million to $400 million. So it kind of gives you a sense of sort of the layering of the vintages of teams that are being onboarded. One thing that I would mention that the $350 million of growth that we saw this quarter, it continued to maintain that sort of just at or under 30% noninterest-bearing deposits. Those deposits also came in at less than 2%, just under 2%, in fact. So I think that -- and that's prior to rate cuts. So just gives you a sense of the high-quality nature of those sort of we call them the singles and double type deposits that our teams are bringing in from the C&I and CRE side.
Sun Young Lee: That's very helpful. And obviously, the cubiX deposits grew a lot, about $800 million this quarter, about 19% of deposits. Any changes to your sort of the internal target, maybe target is not even the right word. How big could this become? I know all of these deposits from cubiX are going into cash. What drove that much of an increase in cubiX? Do you think that this cubiX deposits could sustain in terms of the growth? What is the strategic value that cubiX brings to your platform aside from the NII? Maybe if you could touch on the fee income opportunities from the cubiX payments platform, that would also be very helpful.
Samvir Sidhu: Sure. Absolutely. And if I miss anything, Janet, because I think there's a couple of layers in the question, please remind me after I'm done here. But I think on the cubiX side, just as a reminder, this is -- it's a payments platform, right? So at the end of the day, our customers hold transactional operating accounts with us to support that payments business. So there's a minimum amount of deposits that they hold with us at any given time. What we -- we acted a little bit of a slide in the deck that showed this is what we've seen is, especially since November of last year, we've seen a continuous increase in the payments activity as well as the -- which translates into higher average deposit balances. So on the Q2 call, if you recall, I talked about balances being about 20% higher as of end of July when we had our call relative to the second quarter. As you can see, we maintained or even slightly increased those balances as the quarter continued post the sort of GENIUS stablecoin legislation. So we're continuing to see increased institutional activity from our existing customer base. We're also continuing to see increased institutional adoption. You also heard me say that about 20% of our deposits were coming from traditional finance customers. Even with the growth in our average deposit base, we have continued to maintain that percentage, which sort of just gives you a sense of the growth is broad-based across all of our large core customers as opposed to a customer or 2 or 3. It is universal across the overall customer base. And the low end of our top customers grew by 10%. The rest we're sort of growing overall across the base to that 25% or so -- or so growth. One other thing that I would add, just talking about activity on the network and franchise value, as you were asking about, is we're continuing to sustain. So in October, our levels are about where they were in the third quarter. I'd also say that October, going back to activity, is on track to be our highest cubiX month ever in terms of network volume and activity as well with just 3 weeks of the quarter end. You also got a sense that our activity and overall volume this year as of 9/30 or the third quarter is roughly at where we were for full year '24, which just gives you a sense of how year-over-year we're continuing to increase. So I think that was the first part of your question. I'll address the fee income, and then let me know if I missed anything. So on the -- the fee income in late last year, we started instituting outbound wire fees and some modest fees to our overall customer base. That's to the tune of $8 million or so of overall fee income. At the end of the day, we want to make sure that we have a partnership approach with our customer base that we're not -- that we're making sure that fees are aligned with driving value to our customers and to our customers' customers. So right now, we're focused on continuing to broaden the institutional breadth of our network. We're also really focused on product expansion and with our core customers. And really, what's also important internally at Customers Bank is we're continuing to further enhance our risk and compliance going far above the expectations of what regulatory standards could be and really thinking about how we can continue to build sort of a best-in-class North Star for the overall industry because we and even our customers are going to continue to see more competition as there's broader institutional adoption in the industry, which is a rising tide will obviously lift all boats. But at the same time, we want to make sure that we truly have built a platform that we, our customers and all of our stakeholders view as best-in-class.
Operator: Our next question will come from the line of Steve Moss with Raymond James.
Stephen Moss: Maybe following up on cubiX here for the moment. With the likelihood of additional rate cuts coming, just curious how to think about if there will be any potential increase in fees from the platform.
Samvir Sidhu: Yes. So Steve, it's sort of building off of the answer I gave to sort of the last question is that at the end of the day, as we're continuing to add new products and continuing to partner with our customers on sort of more overall initiatives, we will explore fees. Right now, deposit growth is far outpacing any type of "asset sensitivity" of noninterest-bearing deposits that are held in cash. So I think that for the time being, right now, we feel very good about the position that we're in, sort of cubiX, let's say, all things equal, just with the growth that we've seen this quarter, cubiX's associated interest income would be higher based upon the balances today that we have relative to well over 100, 150 basis point rate cut relative to prior balances.
Stephen Moss: Okay. Got you. Appreciate that color, Sam. And then in terms of the loan pipeline, Mark, you made a comment about a bit of a pull-through. Just kind of curious where does the loan pipeline stand these days? And maybe just kind of what does that business mix look in the current pipeline?
Mark McCollom: Yes. The loan pipeline is broad-based. And I think what you've seen throughout this year is that our growth from quarter-to-quarter will come from different segments. We have a good graphic depiction on that on Slide 10 in the deck that shows where the growth came from this past quarter, where fund finance and commercial real estate led, but we've had other quarters where the commercial banking teams, health care, equipment finance, et cetera, are all going to be meaningful contributors. The point I was making was that the almost $900 million of growth that we saw in the third quarter did include some deals that a quarter ago, we may have thought were in a pipeline to maybe close in the fourth quarter. So our anticipation is that there will still be growth in the fourth quarter, but we don't expect it to approach third quarter levels.
Stephen Moss: Right. Okay. And then maybe just one more for me here. Just kind of curious, you mentioned less -- you've reduced your asset-sensitive position. Just kind of curious what you're thinking about with regard to the margin pressure from a 25 basis point rate cut. I mean I realize there's a lot of noise with the cubiX deposits coming in here, but maybe just size that up a little bit.
Mark McCollom: Yes, sure. So for us, when you go and look at our quarterly numbers, we quote numbers for the impact of 100 basis point, 200 basis point up or down rate move. That's that static view, which is at least one measuring stick to compare us to relative asset sensitivity to other peer banks. Obviously, the limitations on that are that no bank experiences a static across all points of the curve and then sits on their hands and does nothing to react to that. What I would tell you is that while we are still inherently asset sensitive because we are a commercial bank, and as Sam pointed out, our asset sensitivity then also increases a little bit because of our decision to hold all of the cubiX balances in cash. But with some of the -- just the mix of businesses that we have as well as some of the synthetic things that we've done with adding on some received fixed swaps, we're now at a point where for a 25 basis point rate move, it's around $1.5 million annualized impact to our NII. But we think that my comment that we think we're positioned to still be able to produce net interest income growth regardless of monetary policy is that we think there will be sufficient growth to make up any NIM compression we could see from that -- those 25 basis point rate moves.
Stephen Moss: Okay. That's really helpful. Maybe if I could just squeeze one last one in. Sam, you mentioned the title and sports entertainment teams here. Maybe -- and I hear you in terms of potential deposit growth. Is it going to be a similar kind of loan-to-deposit type mix? And maybe kind of curious how many -- are there any additional verticals you may be looking at?
Samvir Sidhu: Yes. Sure, Steve. So I'd say that it's difficult to fully project. I'd say broadly, the deposit to loan is a better way to think about it because these are mostly deposit-focused team. Based upon sort of the teams that we've onboarded, we expect actually that ratio to be higher than what we brought in last year. Remember, last year, we also had stated that in the beginning, as we were taking market share, we were doing more lines and onboarding sort of more existing relationships and refinancing, which meant that our deposits to loans was 3:1 versus stabilized being at sort of 4:1. I'd say these teams are a little bit lighter on the lending side relative to especially some of the specialized national teams and more heavy on the deposit side.
Operator: Our next question will come from the line of Peter Winter with D.A. Davidson.
Peter Winter: Congratulations on a great quarter. My question is on expenses. Mark, can you just give some context around the $3.4 million decline in FDIC assessment? Is there still room to lower it? And then secondly, with this $1.6 million decline in professional fees, is that a function of a lot of the work has been done to address the written agreement now you're expecting kind of just in the back testing phase?
Mark McCollom: Sure. Yes, I'll answer the second question first. On the professional fees, yes, we continue to build out and invest in our risk infrastructure and work through the agreement. And some of those -- some of that is hiring of people. Some of that is augmenting with professional services. Some of that is starting to be completed. So we were pleased that we were able to kind of pull through some of that reduction in the third quarter. We would hope to be able to continue to see that progress being made in the fourth quarter and into '26 in that professional fees line. On the FDIC expenses, as I'm sure you're aware, that calculation, which used to be fairly straightforward, is now a very complex calculation on a quarterly basis, which incorporates several factors, but ultimately is a risk-based calculation. And as we continue to work through and derisk our balance sheet, we are making progress in ultimately getting reductions in our FDIC insurance. In this past quarter, I will say that we were pleased that not only did we see a reduction when we go through the calculation, but that reduction was actually retroactively applied to the first quarter of 2025. So of that $3.4 million reduction, about $1.9 million of that actually related to first and second quarter adjustments. So when you see the total line sitting there at about $8.4 million, $8.5 million, I would expect that line in the fourth quarter to come back up to be closer to $9.5 million to $10 million, but down significantly from where it was in the second and third quarters. I'd also remind you that in that line, the way it's working, it does include more than just FDIC insurance. I mean it also includes other above the line where us as a Pennsylvania bank, we have a PA shares tax, which also rolls through that line as well, plus a couple of other more minor regulatory fees. But good progress being made. We would continue to see progress being made going forward into next year.
Peter Winter: That's great. And then Sam, big picture question. Just -- we're seeing more prevalent use of AI industry-wide. I'm just wondering, can you talk about maybe outline how AI is helping the bank today and maybe how it can help the business going forward?
Samvir Sidhu: Well, Peter, thank you. It's great to get a strategy question, and it's probably our first non-modeling question in a couple of quarters. So thank you so much for allowing us to not look necessarily 90 days back, but look a couple of years forward. But AI is going to be one of the biggest efficiency and client experience unlocks that we as an industry and a country and a globe have seen since mobile banking. Our journey, I'll give you just a little bit of history. So in December of 2023, we formed a cross-functional AI discovery team. We use it to learn about AI, buy the first wave of tools, test and build solutions, train and figure out how to democratize it for everyone at the bank. Since then, we've had various areas of the bank that have seen about a 10% productivity lift or said a different way, 10% savings lift, however you want to think about it. And we see in 2025 that we're going to continue to drive further adoption throughout the bank and begin expanding our planning of Agentic AI systems, which is said a different way, it sort of AI that can observe and decide and act across our platforms and workflows. And that's also going to be sort of how we think about sort of the overall client experience and client onboarding over time as well. That's sort of our medium- to long-term plan. So again, over the next couple of years, we're going to expect AI to lift our productivity significantly. We're going to have it unlock more client experiences. It's not a side project for us. I'm leading the efforts. We see it as a foundation for the next phase of Customers Bank. We've mobilized incredibly early, as you can tell, by looking at that time line of when we formed our team and our governance process, and it's proving value. And so just to kind of put a finer point on it, we've developed over 100 use cases for Agentic AI, and we're gearing up to start beginning to test and implement.
Operator: Our next question comes from the line of David Bishop with Hovde Group.
David Bishop: Mark, just curious, you've seen some good growth here of late, especially in the [ nonoccupied ] commercial real estate, commercial real estate segment. Remind me where your concentration ratio is ending the quarter and appetite to grow those verticals?
Samvir Sidhu: Yes. sorry, Mark, I'll take that. So we're still -- we still remain below 200%, Dave. I think that's sort of the core of your question. But what I would also like to add beyond sort of the actual question is, I think a couple of quarters ago, we sort of talked about how our deposit-to-loan ratio was -- said differently, our CRE loan growth since we onboarded the new teams was fully funded by deposit growth. Well, that's continued. In fact, our deposits are greater than loans since the third quarter of last year when the team started originating. So we have about $700 million or so of deposits we brought in across the franchise at 1.7% and less than that in loan growth at loan yields of north of 6.3%, which is about a 4.5% spread. And what's interesting is the sort of $200 million plus of loan growth in the third quarter, it's incredibly granular. So our average loan size is less than $10 million.
David Bishop: Got it. Great color. And Mark, you noted the swaps, the fixed versus received. Just curious, any granularity you can give us just in terms of maybe rates on received versus fixed? Just curious if you have that handy.
Mark McCollom: I don't have that right in front of me on the details of that notional. I mean it ended up being 2 separate transactions that we did at different times of the quarter. But I can follow up with the actual -- each side of that [ leg ] for you.
David Bishop: Got it. And then, Sam, turning back to the -- especially the Title team, you said that was a national basis. Any way to ring-fence the deposit opportunity there, but just curious maybe how big of a book they managed at their prior shop and what the potential is there to move the needle from a deposit basis.
Samvir Sidhu: Yes. So Dave, it's a bit early to sort of tell. Think of this as sort of a payments platform that is sort of supported on top of our existing retail and commercial title team efforts and platform that we have at the existing bank. And what I would say about this is these types of team recruitment initiatives. I think we've stated this before when folks have come to us and asked about sort of the types of teams that we look for. If you go back to 2023, the team that we brought on in '23 had a multibillion-dollar book. The team that we brought in -- the teams we brought in '24, most of the teams had individually about $1 billion or more of book. And similarly, as we sort of look to acquire and recruit sort of larger teams in '25, we've also looked for that similar type of threshold. So we see it as an interesting opportunity for us to leverage our operational strength, our technology strength as well as sort of the single point of contact commercial delivery model.
Operator: Our next question comes from the line of Kelly Motta with KBW.
Kelly Motta: Congrats on the quarter. Maybe hitting on asset quality. Your track record has been really strong. And just in light of the really strong growth you've been seeing and the earlier focus during earnings season towards NDFI lending, can you just provide some comments as to -- clearly, you've been very thoughtful in your approach. Just -- what are the biggest verticals within that for you? And what gives you comfort on those?
Mark McCollom: Sure, Kelly. It's Mark. Yes, we do think, as I mentioned earlier, credit quality has always been a critical success factor for us. And when we focus on our NDFI exposure, we think that, that's also a credit strength of our franchise, and we believe arguably one of the lower risk credit risk portions of our overall C&I portfolio. I'm sure as the analyst community has learned, when you look at that category on a call report, not all NDFI lending is created equal. There are several different categories that roll up to that. For customers, NDFI loans generally fall into 3 categories: Mortgage warehouse and what we call fund finance or capital call lending, those 2 categories make up just a little less than 0.5% of our overall exposure. And then the lender finance piece makes up the other half. The first 2 categories, mortgage warehouse and capital call lending, I think most people understand those businesses and understand that they have inherently very low credit risk. Most of the recent attention this past quarter has been on the lender finance space. For customers, this is one of the oldest specialized lending businesses we've been in. It's one we've been in for over a decade. And we've not only had 0 losses, but 0 loan defaults. In this business, this is typically lending to a private credit fund where the collateral is a broadly diversified pool of loans to middle market companies. There's significant overcollateralization. We have low advance rates, and there is -- it's very diversified. So our single obligor exposure is very low, kind of mid-single digit. So when you put all those things together, it's translated into, again, 0 losses, 0 defaults. The last comment I'll make on that space is that it's always really important to understand who you're lending to. So depth of relationship is key. Again, we've been in the business for 10 years, and we have, on average, about a 5-year track record with the managers that we do business with.
Kelly Motta: That's really helpful color, Mark. And then I know we've covered cubiX quite in depth here, and it's been a source of strength for you guys. Wondering, given the news of de novo entering the digital asset space, any updated thoughts in terms of the competitive moat here?
Samvir Sidhu: Yes, sure. And I think that just to sort of highlight, Kelly, at the end of the day, we've -- I think we've done a pretty good job of highlighting the strength of the existing stable large-scale network and the benefits of network effect. We've also made sure that we're fully integrated and broadening our relationship with our existing customers. We've built an incredible amount of brand loyalty, and we've made significant investments in technology and risk management. So I think that's what I would sort of just sort of recap a little bit with. But to your question about sort of competition from fintechs, and there's a host of reasons that companies may want to get banking or trust licenses like trust and custody, you do consolidate under a national charter, engage in international activities beyond sort of typical state borders and offer sort of consumer products and services. So all of these are complementary to cubiX. And one of the things that's really interesting is that we have a significant number of customers that either directly are a license holder of a charter or hold subsidiaries that have a charter already, and they hold their primary accounts at Customers Bank because of the value of our network. And I think that's one of the most important things is we have a very robust 24/7 network that our customers, our customers' customers and the industry relies on.
Operator: Our next question will come from the line of Hal Get with B. Riley Securities.
Harold Goetsch: First question is, could you just go over the details of the $10 million net income kind of benefit in the quarter? And I think you said it was going to benefit the fourth quarter as well as kind of a housekeeping it better to understand that. And then two, back to the second question is on the FDIC insurance. Is there any way to say like, hey, your equity raise helped lower -- derisk the company a little bit, that helps lower your FDIC assessment. Is there any way of quantifying what that might have been as part of the formula just for our own identification?
Mark McCollom: Yes, sure, Hal. This is Mark. So for the FDIC insurance, yes, the capital raise would have helped that somewhat. Again, it is a very complex calculation with multiple factors, but your common equity Tier 1 ratio is one of the factors that goes into that. However, I would say that some of this is also just more broader-based progress we've made across just deposit growth, reducing broker deposits. There are multiple factors that play into it. And the capital raise impacted our third quarter assessment. But as I said, some of the relief that we received was due to -- was retroactive to the first quarter. So it really reflects the progress we had made in the prior 2 quarters as well. Moving to the net interest income benefit. In the second quarter, we had previously originated some loans and had participated those loans to a partner. We had an opportunity where that partner approached us in the second quarter to repurchase those loans and it was a small pool of loans, but we had an opportunity to repurchase them at a pretty significant discount. So we executed on that transaction in June, had a very small level of accretion benefit in the second quarter. But then we had highlighted on that call that we would then see a $10 million benefit from that discount accretion in the third quarter. We would see another $10 million incremental benefit in the fourth quarter. And then that discount accretion would largely go away for the first quarter of 2026. I hope that explains that. And while I also have the benefit here, I'll answer Dave Bishop's earlier question. On the received fixed swaps that we put on, we put on those at a received fixed rate between 350 and 360 and then we're paying 1 month SOFR on that. So when you put on those kind of swaps, that's actually a negative to our net interest income right now. But again, you don't put on swaps to earn money or not earn money. It's for risk management purposes. And if rates would fall more than 75 basis points from where we are today, which the forward forecast would certainly predict at some point in 2026, those swaps would actually turn positive on us.
Operator: Our final question will come from the line of Matthew Breese with Stephens.
Matthew Breese: A few questions for me. Maybe big picture, Sam, for you. In April, the Treasury put out a report looking at potential growth of stablecoin, and they set some really lofty targets. I think they said stablecoin outstanding could hit $2.8 trillion by 2028, longer term, north of $6 trillion, balances today around $300 billion. The use cases in stablecoin are still very heavily tilted towards crypto. So maybe, one, do you agree with these longer-term targets? And two, how do you expect stablecoin usage to kind of break out of its current pie chart being so heavily tilted towards crypto trading and hit the masses?
Samvir Sidhu: Matt, thanks for the question. It's helpful to have an analyst like you who's been covering and following the industry for such a long period of time. So your question is a good one. I think the treasury put out some incredibly lofty targets. And I think the perspective from Treasury's perspective, as I understand it, was to sort of give a little bit of a reference point and justification for GENIUS, but then also sort of a sense of demand for U.S. treasuries. So this is sort of a bit of my view in early stages. What I would say is that you're absolutely right, somewhere between 85% to 95% plus of current stablecoin activity is related to digital asset trading and settlement, and that's something that we see on our platform as well. What I would say is that there are a tremendous amount of obvious use cases for stablecoins as you think about cross-border and FX. It just -- it's reasonably intuitive and easy to kind of reconcile that for anyone who's tried to operate with sort of U.S. cards or U.S. fiats just physically going as a tourist, but then also imagine that from a commercial perspective and sort of engaging and holding working capital and transacting with folks across the border. I expect that some of the large banks that have capital markets divisions will find some interesting use cases for stablecoins in a lot of their businesses as you think about the utilization, specifically of blockchain beyond just sort of the U.S. dollar sort of movement across. And then finally, I think the biggest demand from my perspective is going to come from non-U.S. domiciled customers and countries where there could be high inflation. There is an opportunity to leapfrog from a point-of-sale perspective and really utilize the stablecoin as a transactional stablecoin to transact off of and sort of pay off of. I think those are sort of where I see some of that sort of non-U.S. growth potentially coming, and that would sort of flow into treasuries more locally. But what I would just remind you and everyone is that we have designed our platform to be really the infrastructure provider just the stablecoin to U.S. dollar sort of stablecoin issuers and to really be prevalent and relevant, you really need to be on our network and present in our bank. And that's really what we think we've done in a very unique way.
Matthew Breese: Appreciate all that. A couple more for me on cubiX. I think someone else asked it earlier, but you're now up to knocking on 20% of total deposits, north of 60% of your demand deposits are in cubiX. Where do you draw the line in terms of safe balance sheet exposure to this industry? I know historically, you had a 15% cap. Where do we stand in terms of updating that cap or putting some limitations, especially given the volatile nature of the industry and the history of banks that have catered here?
Samvir Sidhu: Sure. I'm happy to take that. So I think that, Matt, this question was asked last quarter and our view doesn't change and hasn't changed quarter-to-quarter. What I would say is that just as a reminder, even prior to March of '23, the industry did not hold these deposits in cash, ourselves included. And I think that's a really important change that we decided to make until we sort of had really strong operating history and that we could rely on. One of the things that's a little bit perspective that's more internal that we haven't necessarily highlighted as much is a number of our large institutional customers sort of give us minimum target thresholds that they want to sort of operate in, average balance thresholds that they sort of want to operate in that they adhere to, which is incredibly helpful for us from sort of a stability perspective. And that's seen in that 30-day rolling average deposit balance chart that we provided to you there. And I think that's really important. So that's sort of the way that we think about the $900 million that we -- or $800 million rather, I should say, that we grew in this quarter. It's being held in cash. It's adding interest income to our platform and continuing to strengthen the value of our overall franchise and sort of earnings base. And right now, I think as I mentioned earlier, we're really focused on institutional breadth of the network and product expansion, which will bring additional opportunities on the fee side and really also bring additional competitive moat to the overall infrastructure, especially when you sort of layer on the risk and compliance investments.
Matthew Breese: Got it. And then I did notice that the dollar amount of uninsured deposits ticked up this quarter. And I asked a similar question last quarter, but I was curious about what the average size of deposits are on the cubiX network. And are there any that are -- or how many are north of, call it, $250 million in kind of average balances?
Samvir Sidhu: Yes. So Matt, I think that -- I don't have the exact sort of number on uninsured deposits, but I think our overall uninsured deposits -- insured deposits and sort of collateralized deposits is well above sort of industry averages, I think is incredibly important. And sort of large cubiX depositors, I mentioned this before is, yes, we have large exchanges that are incredibly critical to the industry and to customers bank and to the network. And at times, these deposits do get in sort of the multiple 9-figure type territory. But what's important about the network, which is helpful, and I mentioned this earlier, is broad-based, nearly every customer increased of the hundreds of customers that are on the platform, increased their deposits based upon activity in the third quarter. And I think that's sort of how to think about the overall growth of our platform and strength of the network.
Operator: That will conclude our question-and-answer session. I'll hand the call back over to Sam Sidhu for any closing comments.
Samvir Sidhu: Thank you, everyone, for your interest in and support of Customers Bank. We really appreciate you being a part of this incredible franchise that we're building. And I really want to give a special shout out and thank you to our incredible team. Have a great day and a great weekend.
Operator: That will conclude today's call. Thank you all for joining. You may now disconnect.