4/25/2025

speaker
Conference Operator
Operator

After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star 1 on your telephone keypad. I'll now turn the conference over to Dave. Please go ahead.

speaker
Dave
Investor Relations Host

Thank you, Sarah, and good morning, everyone. Thank you for joining us for the Customer Bank Core's earnings webcast for Q1 2025. The presentation deck you will see during today's webcast has been posted on the investors' web page of the bank's website at customersbank.com. You can scroll to Q1 2025 results and click Download Presentation. You can also download a PDF of the full press release at this spot. Our investor presentation includes important details that we will walk through on this morning's webcast. I encourage you to download and use the document. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risk and uncertainties that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings including our Form 10-K and 10-Q, for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time, it's my pleasure to introduce Customers Bank Corps Chair, Jay Sidhu. Jay?

speaker
Jay Sidhu
Chair, Customers Bank Corp.

Thank you, Dave, and good morning, ladies and gentlemen. and welcome to Customers Bank Corp. first quarter 2025 earnings call. Joining me this morning are President and CEO of the bank, Sam Sidhu, and Customers Bank Corp. CFO, Phil Watkins. We are pleased with the way the company started the year with strong core performance from across the franchise. We will walk through those results in more detail. First, I'd like to take this chance to acknowledge the hard work by our incredible team members on four fronts that we have made an absolute priority at the company. First, the continued impressive transformation of our deposit franchise. Second, strong loan growth from well-diversified sources, all reflecting superior credit quality. improved efficiency with execution of our operational excellence initiatives, and last but not the least, significantly above average net promoter scores, making us one of the top banks delivering superior service as viewed by our clients. The industry is currently facing, as you all know, complex and evolving macroeconomic landscape. Recent developments have led to increased market volatility and uncertainty. We believe that customers' differentiated business model positions us well to navigate these challenges while we maintain flexible and remain responsive to changes in this changing external environment. And importantly, our customer-centric mindset and commitment to service provided by our very experienced colleagues We are very well positioned to serve our clients as the environment continues to evolve. As you can see on slide three, we have built an incredible franchise, combining the best of a large bank's technology and product offering with the nimbleness and service level of a smaller institution. That's a good segue for us to move to slide four, where I'll cover why we believe we are building a company that you can almost call being built to last. What does it mean by building a bank that's built to last and be able to deal with the complexities and opportunities available in this rapidly changing environment? For us, it comes down to maintaining an absolutely clear strategic direction, having a deep understanding of our key drivers of financial performance, and always maintaining strong risk management, and excellence in client service. Our strategy is anchored by a single point of contact service model that drives organic growth one relationship at a time by developing deeper relationships with our clients. Our proven model is infused with our commitment to exceptional client service. That commitment is the cornerstone of our culture and the key to our success. one where our goal each day is to have our clients say, wow. Our service model, driven by exceptional and knowledgeable service-oriented colleagues who are empowered to serve their clients' needs by delivering the entire bank to them. These relationships compound driving growth through repeat businesses and referrals. This unique model is a very important key differentiator. Our culture is inspired by the entrepreneurs we serve. In this entrepreneurial mindset that allows bankers to develop innovative solutions to address some of our clients' most pressing challenges. In addition to fostering loyalty and generating referrals, our entrepreneurial culture draws top talent to our organization In the past few years, we welcomed well over 100 client-facing team members, as well as leaders and team members in areas such as credit, risk management, marketing, technology, and operations. Sam will talk more about those later in the presentation. We remain focused on providing the sophisticated products and services of a larger bank with the attention and service level of a private bank. We believe our differentiated service model and our continuous monitoring of the key drivers of our financial performance continue to help us lead to success over the long term as well as in the short term. We've said many times before that we believe a strong and sticky core deposit and loan base results in sustainable growth in revenues, in EPS, and intangible book value. We believe these are the key metrics for long-term performance in bank stocks. Over the last five years, we are proud to have delivered above average annual growth rate of 15% in revenue, 20% in core EPS, and 16% intangible book value. This performance made us the number one bank of all banks between $20 billion and $100 billion in assets in earnings per share and tangible book value compounding. We have made significant investments in our risk management infrastructure across people, processes, and technology as we strive to meet and exceed our own and our shareholders' expectations. We believe risk management can be a strength and competitive advantage for us. And with the investments we are making in risk management, this will give us the foundation and capabilities of a much larger, complex organization. Hence, taken as a whole, our strengths are we have a clear strategic direction, we have attracted above average experienced talent. We have a customer-centric culture that is very well viewed by our clients, and we will never take our eye off of this. Next, we have keen awareness of the external environment. Next, we are making our investments in new products and technology and continuously improving upon that. And we have our absolute commitment to sound risk management and excellence in service. In our opinion, these trends have combined to enable us to deliver above-average results that Sam will now share with you for the first quarter 2025. Sam?

speaker
Sam Sidhu
President and CEO

Thanks, Jay, and good morning, everyone. It's great to have an opportunity today to walk you through a very strong quarter for Customers Bank. our business continued to perform well. Our core beat was driven by strong financial performance across the franchise. I'll walk you through some of the key accomplishments in the quarter, which provide an excellent start to the year. Our deposit transformation momentum continued as we once again saw significant low-cost granular deposit growth strengthen the quality of our deposit franchise. This is evident with another 25 basis point reduction in our average cost of deposits in the quarter. Combined with a strong performance last quarter, our average cost of deposits are down 64 basis points from their high in Q3 of 2024. For the second quarter in a row, our commercial team's X cubics had nine-figure non-interest-bearing deposit growth, with over $250 million in this quarter alone. We bucked the market trend, growing the loan portfolio at a 12% annualized pace. We were able to accomplish this while being selective on the credits we onboarded. This is because much of the growth came from our bankers bringing over their longstanding, trusted relationships to customers' bank. Our net interest margin increased by two basis points in the quarter, driven by interest expense reduction. We executed on our operational excellence initiatives, surpassing the targets that we first outlined last year. These savings initiatives will provide us the headroom for the investments we are making in support of our future growth. We also decided to undertake an additional balance sheet optimization process by identifying a portfolio of corporate and asset-backed securities for sale. This decision was driven by two main factors. One, our bankers achieved strong loan growth in a typically soft quarter, and we are reinvesting a majority of the cash generated from this sale into loans. With this, we felt it was prudent to reduce the credit-sensitive nature of our AFS portfolio to fund this growth. We feel even better about the balance sheet optimization decisions we made based on market developments recently. And at this point, you should not expect any additional securities repositioning transactions. Last but not least, we continue to maintain extremely strong metrics across capital, liquidity, and credit quality. Capital remains strong with CET1 above our internal targets at 11.7%, and our TCO ratio increased to 7.7%. Our coverage of immediately available liquidity to uninsured deposits is robust at 155%. Our NPA ratio remains low at 26 basis points, well below peer averages, and reserves to NPLs are strong at 324%. Advancing to slide six, you'll see our gap financials, and then moving to slide seven, I'll run you through the core financial highlights for the quarter and full year. As I mentioned, we had an incredibly strong performance across the board as we delivered core earnings per share of $1.54 in the quarter on net income of $50 million. This represented core ROCE and ROA of 11.7% and 97 basis points, respectively. Credit metrics remain strong, and these results represent a great start to the year and provide excellent momentum for the balance of 2025. Now on slide eight, I'll cover our deposit transformation, which remains our top financial priority. We are once again thrilled by the work by our team to improve our deposit franchise, which continued to shine in the quarter. To recap some of the impressive results, total deposits increased to just under $19 billion. The new teams brought on since mid-2023 continue to execute exceptionally and increase their deposit balances by about $400 million in the quarter. The quality of these deposits help reduce our deposit costs as we remix these deposits at about a 200 basis point interest expense benefit. The new teams manage relationships with over $2.1 billion of granular, low-cost relationship-based deposits representing about 11% of our deposit base. It's an incredible accomplishment in such a short time. The momentum on commercial deposit account opening is continuing, with total commercial accounts up about 14% annualized in the quarter and over 50% since the end of 2022. This highlights the franchise-enhancing and granular nature of the growth. Our non-interest-bearing deposits remained at a healthy $5.6 billion, or just under 30% of total deposits. As I mentioned earlier, our traditional commercial banking franchise brought in over $250 million of non-interest bearing deposits. Over the last two quarters, that is now nearly $400 million of non-interest bearing deposit growth from the traditional commercial banking franchise alone. The power of the deposit remix was in full effect as evidenced by our ability to reduce our average cost of deposits by another 25 basis points this quarter. To date, this represents a 69% beta so far in the down cycle, in excess of the 60% deposit beta we had on the way up, demonstrating the power of the deposit remix tailwinds. With our ability to continue to take market share, the pipeline continues to rebuild. Even with this quarter's strong deposit performance, our go-forward, low-cost, granular deposit pipeline has been replenished at, again, over $2 billion and growing, which I'll expand on in a minute. With that, let's turn to slide nine for a bit of a deeper dive on the incredible success of our team recruitment strategy. Core to our strategy is our ability to consistently attract top talent from across the industry. Our recruitment efforts over the last few years showcase this and have added tremendous value to our franchise. As a reminder, we entered the venture banking space about three years ago with a small team lift out. Then in June of 23, just months after the banking crisis, we took that business to the next level acquiring a loan portfolio from the FDIC, and brought on 30 new bankers. Today, the business now has over $850 million in deposits, is essentially self-funded, and is a top five national competitor. Over the past two years, we have significantly expanded our presence in the market, achieving more than a five-fold increase in our deposit accounts and growing deposits by three-quarters of a billion dollars. Nearly a year later, we recruited 10 highly experienced commercial banking teams with deep industry expertise and strong regional market knowledge. These teams are fundamentally changing the profile of our commercial deposit base and enabling us to scale our existing relationship banking franchise. In less than a year, these teams are now profitable and managing approximately $1.3 billion in deposits and have added 5,000 accounts to our franchise. We've already demonstrated the power of our team-based deposit acquisition strategy, and now we're building on that foundation to enter the next phase of franchise expansion. One centered on growing what we've proven works. Exceptional client service driven by entrepreneurial colleagues who are empowered to serve their clients' needs. The market for top-tier talent remains highly dynamic, and our reputation as a high-performance, tech-forward institution is making Customers Bank a destination for relationship-driven commercial bankers. The flywheel is turning and our pipeline for deposit team recruitment is strong. We've already onboarded a new team this year. Two additional teams have accepted offers to join and more to come. Any new additions would add to the already significant $2 billion low-cost deposit pipeline that I mentioned previously. Ultimately, this next phase in our deposit transformation is about intelligent expansion, not just bigger, but better, driving long-term franchise value and delivering differentiated results. Now let's turn to slide 10 to discuss how these team-driven deposits are powering our strong loan growth results. This was another exceptional quarter of loan growth for us. We again delivered over $600 million of HFI loan growth, which was well diversified across our platform. But what's more important is how that growth was achieved. It was diversified, strategic, and aligned with our franchise building model. Top commercial verticals included the new commercial banking teams, commercial real estate, and healthcare with contributions from multiple other groups. Each vertical is focused on long-term client engagement and brings with it fulsome deposit-led relationships. As an example, over the last three quarters, we've had nearly $500 million of self-funded net loan growth in the commercial real estate industry, which, as you can appreciate, is typically unheard of. And this comes with more than a 4% net spread between loans and deposits. In a muted lending environment where many peers remain on the sidelines or retrenching, we are winning client relationships, often from much larger institutions. While they may be new to customers bank, these clients are not new to our team members who often have decades-long relationships. Our ability to move decisively, offer certainty of execution, and deliver relationship banking through a single point of contact model is resonating in the markets. This growth is achieved with discipline as a strong credit culture has always been a top priority for our institution. As many of you know, we tend to focus on verticals with inherently low credit risk and where we have deep industry expertise. This is why we've continued to have excellent credit performance through the cycles. Let me take this opportunity to build off of what Jay covered earlier. We've talked a lot about deposit remix recently, but I don't want to overlook the loan transformation that has occurred at our company. Over the last five years, we reduced our concentrations in mortgage finance from 25% to 10%, multifamily from 20% to 15%, and consumer installment from 13% to 6%. At the same time, we lean into lower-risk, relationship-based, specialized verticals like fund finance with the growth of our subscription line business, regional C&I, and venture banking. Our pipeline and backlog heading into Q2 remains robust, and we continue to prioritize capital-efficient deposit-accretive lending that strengthens client engagement and enhances the overall franchise. With that, I'll turn the call over to Phil.

speaker
Phil Watkins
CFO

Thanks, Sam, and good morning, everyone. Turning to slide 11, I'd like to walk through our net interest income and margin performance, which continue to reflect the strength of our balance sheet strategy and disciplined executions. In Q1, we delivered $167.4 million in net interest income, and our net interest margin expanded to $313, up two basis points sequentially. This marks our second consecutive quarter of margin expansion. The primary driver of this improvement was a significant reduction in interest expense, which was lower by $14.6 million quarter over quarter. This was achieved through deliberate and proactive deposit remixing. This helped offset a decline in loan yields from lower benchmark rates and demonstrates that the quality of our funding base is improving in ways that support earnings durability. Though the rate trajectory remains uncertain, the value-added opportunities we have on both sides of the balance sheet provide the foundation for net interest income expansion across a range of rate scenarios. On slide 12, we'll cover non-interest expenses. We are incredibly proud of our performance on efficiency this quarter. In Q1, our core non-interest expense declined 5% sequentially to $103 million. That decline came even as we continue to invest in technology, talent, and our risk management infrastructure. Our core efficiency ratio improved to 52.7 with non-interest expense to average assets of 1.87%, placing us at the top of banks in our peer group. Moving to slide 13, I'll recap the progress of our operational excellence initiatives, which is how we achieve those strong results. We previously outlined a target of $20 million of annual efficiency through a combination of fee income growth and expense savings to reinvest in our business. I'm pleased to say that we've outperformed that target. As of Q1, we've realized $30 million in annualized impact, exceeding our original $20 million target. This includes approximately $22 million in cost savings and $8 million in new recurring fee income, primarily through treasury management fees enabled by our proprietary Cubix platform. I would note that this does not include future professional services expense reductions we've discussed previously. These results reflect structural, scalable improvements across the organization. We've consolidated technology platforms, rationalized vendor spend, and made strategic decisions around our operations. At the same time, we've strengthened revenue generation through enhanced payments, treasury, and commercial deposit capabilities. As a result, we expect strong growth in core non-interest income this year compared to last year. Importantly, these savings give us tremendous headroom to reinvest in the franchise, targeting high impact areas such as risk management and technology, in addition to the team recruitment opportunities Sam outlined. This ensures we continue building a platform that is not only efficient, but differentiated and future ready. Looking ahead, we continue to see opportunity to deepen this impact as we scale and drive operating leverage. Our commitment remains clear to grow responsibly, invest strategically, and deliver long-term value to shareholders. On slide 14, you can see the tangible bulk value per share ended the quarter at $54.74, up more than $5.50 year over year. This continues our track record of double-digit annual growth. For us, tangible book value growth is a key long-term performance indicator. Over the last five years, we've more than doubled TBV per share, even while navigating a global pandemic, an inflationary rate shock, and a regional banking crisis. And we're committed to continuing that trajectory. With that, I'll move to slide 15. Our capital ratios across the board remain robust and provide us with substantial flexibility for organic growth opportunities. Our TCE ratio increased by about 10 basis points in the quarter, even with growth in the size of our balance sheet and the impact of the securities portfolio repositioning. At 11.7%, we remain in excess of our CET1 target while utilizing some risk-based capital for loan growth in the quarter. On slide 16, we continue to be pleased overall with our credit performance. Non-performing assets remained low at 26 basis points of total assets, and reserves to NPL stayed strong at 324%. Total net charge-offs were in line with the average over the previous four quarters, and our commercial and consumer portfolios are both performing well. While we continue to closely monitor any emerging risks, we feel the portfolio is well-positioned. With that, I'll pass the call back over to Sam before we open up the line for Q&A.

speaker
Sam Sidhu
President and CEO

Thanks for that, Phil. As we look ahead to the rest of 2025, though there is increased market volatility, we're excited about our positioning and confident in our ability to navigate the current environment. We're reaffirming our full-year loan growth guidance with a bias towards the higher end of the range given our outsized performance in the first quarter. Again, because this is in large part to We are onboarding our bankers' legacy relationships. We are able to achieve this while remaining disciplined in our credit selection and underwriting. On the funding side, our deposit growth is driven by the expansion of the commercial franchise led by the new commercial banking teams and deepening of relationships within our client base. Net interest income is projected to grow between 3% to 7% year over year. And as a reminder, we had a larger accretion income in 2024. And so this equates to 6% to 10% on a normalized basis. Our deposit remixing efforts and strong loan growth position us well to drive NII expansion regardless of the rate environment. On the back of the success and the outperformance of our operational excellence initiatives, we are on track to achieve our core efficiency ratio target in the low to mid 50s for the full year. And we remain committed to operating with higher levels of capital. With the clarity of strategy and strong execution, our forward outlook reflects both optimism and discipline. As we wrap up today's presentation on slide 18, I want to take a moment to recap what the first quarter demonstrated, not just in terms of financial results, but in terms of strategic clarity and execution. We delivered on a strong performance across the franchise. On funding, we had a 25 basis point reduction in deposit costs, driven by our successful remixing into lower cost deposits. On the loan side, we had 12% annualized loan growth achieved through disciplined relationship-based lending across diversified verticals. Our net interest margin expanded for the second consecutive quarter, signaling improved funding dynamics and continued momentum on both sides of the balance sheet. And we maintained strong credit metrics. What stands out is not what we accomplished, but how we did it. Our client-centric culture, disciplined risk framework, and high-performing teams continue to drive differentiated results. In closing, we're building on a strong foundation, one defined by disciplined execution, strategic growth, and a relentless focus on our clients. With the right talent, technology, and operating model in place, we're confident in our ability to sustain this momentum. Our strategy is clear, the team is aligned, and we remain committed to delivering long-term value for our clients, communities, and shareholders. With that, we'll open up the line for questions.

speaker
Conference Operator
Operator

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure you are not on speakerphone and that your phone is not on mute when called upon. Thank you. Your first question comes from Frank Chiraldi with Piper Sandler. Your line is open.

speaker
Frank Chiraldi
Analyst, Piper Sandler

Good morning. Just in terms of the new banking teams the deposits coming over uh Sam sounds like that's still 25 of that is non-interest bearing and that's still kind of the the expectation uh going forward and uh just if that's the case just curious you know the the offset in the quarter uh in terms of non-interest bearing is that just you know continued general pressure to move some funds and get some returns uh overall

speaker
Sam Sidhu
President and CEO

Good morning, Frank. Thanks so much for the question. So in terms of the new teams, you're right. It's at least 25%. It's actually generally closer to 30% compensating non-interest-bearing deposits. And yes, we saw a couple hundred million dollars of increase from our commercial teams. We also had about $300 million in lower cubics balances, and that's sort of the netting out, and that's why it's slightly down for the quarter. But really, from an operating perspective, if you look at our average non-interest-bearing deposit balances, they were up significantly quarter over quarter.

speaker
Frank Chiraldi
Analyst, Piper Sandler

Okay. And then just switching gears as a follow-up, just in terms of the restructuring in the quarter, you know, is there any – does this – kind of do it in terms of, and you might have mentioned, I know you talked a little bit about the fact that you don't expect any additional restructuring, but does this kind of do it for any sort of credit sensitive instrument within the investment securities book at this point?

speaker
Phil Watkins
CFO

Yeah. Hey, Frank, good morning. Yes. As Sam said, we don't you know, we don't see anything else that we would do on the restructuring front. And just a little bit more detail. We provided some some detail in the back. But, you know, as you saw, about 45 percent were corporates, which takes that down in about half with the remaining predominantly investment grade. 40% of it was ABS and that was really CLO and non-agency CMBS. And so with that, essentially all of our CLOs, that takes down essentially all of our CLOs and all the remaining CMBS is agency backed. And then the CMOs were unrated privates and all the remaining is AAA.

speaker
Frank Chiraldi
Analyst, Piper Sandler

Okay. Yeah. And just trying to think about it from others' books, was there anything specific you would call out in the quarter in terms of credit impairment within that stuff in terms of the loss you guys took to move that book?

speaker
Sam Sidhu
President and CEO

Yeah, Frank, as Phil mentioned, it was really sort of a de-risking exercise for to support our loan growth. And I think that's really the important thing. If you actually look at the last quarter, while we call these securities repositioning in Q4, we use majority for loan growth. Same thing here. So it's actually, I think, balance sheet optimization is a much better way to consider this. So we thought in this environment, especially with what we saw towards the end of the first quarter, we wanted to focus on our deposit and loan growth. And that's where we would want to have the focus on the asset side of the balance sheet.

speaker
Frank Chiraldi
Analyst, Piper Sandler

Okay. All right. Fair enough. Thank you.

speaker
Conference Operator
Operator

The next question comes from David Bishop with HubD Group. Your line is open.

speaker
David Bishop
Analyst, Hub Group

Yeah, good morning, gentlemen.

speaker
Sam Sidhu
President and CEO

Good morning, Dave.

speaker
David Bishop
Analyst, Hub Group

I'm curious, Sam, we've seen some good growth here lately, especially on the commercial real estate side. Remind us, the capacity to grow commercial real estate lending, both on the non-owner-occupied and the multifamily space, there's still plenty of capital room, correct?

speaker
Sam Sidhu
President and CEO

That's right, Dave. So, you know, I think we in our book last quarter and the quarter before we talked about being under 200%, 190% plus or minus in that quarter over quarter, despite our loan growth typically stays flattish. So a ton of capacity compared to peers that are in sort of the three to 500% range in our home markets. And I think what's really interesting is, you know, touching on the fact that these are self-funded with real estate deposits is really the interesting part. And I said, you know, over 4%, I think, you know, sitting where we are today, it's 4.4% is what we've been able to achieve over the past year.

speaker
David Bishop
Analyst, Hub Group

Got it. And then maybe on the income statement, You noted the traction in some of the treasury management products. Is this a pretty good run rate for that – I assume the treasury management fees are in that other income. Do you think you can grow that off this $3 million-plus run rate? And from a tech spend perspective, is this a good run rate for the technology expenses, or will there be more investments?

speaker
Sam Sidhu
President and CEO

Yeah. Hey, Dave. So, you know, on the on the starting with the Treasury fee income side, you know, we're up slightly from where we were on the new rollout quarter over quarter, a couple hundred thousand dollars. I think we feel like we're in a pretty good run. Right. To answer your question, I think, you know, caveat that by just saying, you know, these are the successes of what we laid out in the middle of 2022 and sort of building our Treasury management platform here. building our Cubix platform and then rolling it out to our larger corporate clients and then seeing the results of that lending to, which actually speaks to the benefit that the customers are achieving. So I think that we're sitting at a pretty good run rate today. On the technology spend, the technology spend associated with these fees, absolutely, it's pretty much behind us. So I think that's the nature of where your question was going from an ROI perspective.

speaker
David Bishop
Analyst, Hub Group

Got it. And I saw a question. Curious, you know, saw the continued decline in the cost of deposits. It was 282. Do you have the spot cost at the end of the quarter? Thanks. And I'll have them back in the queue.

speaker
Sam Sidhu
President and CEO

Yep. It was at 282. So spot's the same as the average. Great. Thank you.

speaker
Conference Operator
Operator

The next question comes from Steve Moss with Raymond James. Your line is open.

speaker
Steve Moss
Analyst, Raymond James

Good morning. Morning, Steve. Morning, Sam. I apologize. I hopped on late. So if you address this, I apologize. But in terms of the QBICS deposits here, it sounds like I think you said $300 million down quarter over quarter. Sam, just kind of wondering, you know, what you're thinking for, you know, those balances, if you're going to grow them over time here, and just maybe just talk a little about, you know, where you see the opportunity going forward.

speaker
Sam Sidhu
President and CEO

Yeah, sure. So they were at 3.3. I think what's important is the average was also 3.3. And again, these are payments, deposits. And as a reminder, they're held entirely 100% in cash. So as we think about the... The spot versus average, they typically have been oscillating between a 10% band, plus or minus. And we continue to support our clients, how they need us, when they need us. We're not necessarily looking to directly expand these deposits. We have the entire institutional network base of all of our digital asset customers. We have all the operating transactional accounts that the industry really operates on. So, you know, if our customers need additional deposit headroom related to sort of their operating transactional accounts, you know, we will support that. Having said that, you know, we are holding these all in cash. And sitting where we are today, it's not necessarily something we're looking to lean into to increase deposits because this is really payments float. And I would just contextualize that by saying that one of the things that I think that is underappreciated, number one, is that we've built this proprietary technology platform that the industry relies on. The second is really is that we hold about 1%, maybe slightly over 1%. of the liquidity in the digital asset industry. And I think that that's also something that's a really important call out is that a lot of the deposits are actually held at the large banks and by asset managers. So we hold the operating transactional accounts. And as you can appreciate, there's yield that's being received on those excess corporate or reserve accounts.

speaker
Steve Moss
Analyst, Raymond James

Great. I appreciate all the color there. And then in terms of the loan growth front, Um, I guess, you know, the guide strikes me as conservative here, given this quarter. Um, you know, I, I'm assuming you just kind of a little bit uncertainty. The outlet makes you reluctant to, um, to, to take it up, but just kind of curious as to how you think about the pipeline here and the pull through on that pipeline.

speaker
Sam Sidhu
President and CEO

Yep. Absolutely. You know, Steve, I think if you had asked us on April 2nd, which is when we all sat down, it was a Wednesday, I believe. Monday was the 31st. We sat down on Wednesday, April 2nd. We talked a little bit about how the quarter, the second quarter was, you know, looking and we had sort of a soft close of the books. You know, we had a very different outlook than we did, you know, just a couple hours later that afternoon. So, yes, there is market volatility. Having said that, I think what's important is that backlog is what I would focus on, you know, as opposed to, you know, pipeline. Pipelines remain strong. That's, I think, generally consistent from the macro sentiment we've heard across the industry. But backlog is also important. you know, strong and stronger than, you know, what we would have anticipated, especially on the heels of the first quarter. I think what's really important is we talked about sort of the diversification over the last couple of quarters. We've been sharing a much more granular breakout of the loan growth that's coming by vertical. And then you also, you sort of contextualize against that, against the portfolio remix that we've had over the last five years. I think we're really, really proud of the efforts that we put together. And it is a unique differentiated model to not just be bringing in organic low-cost commercial deposits, but then also sort of complementing that side of the balance sheet's remix and growth with the ability to also deliver franchise-enhancing granular loan growth. We're talking single-digit millions type loan growth per average borrower here. Right.

speaker
Steve Moss
Analyst, Raymond James

Okay. Appreciate that color. And then maybe just So one last one for me, I assume you probably said it's in your prepared remarks and I missed it, but just where's the deposit pipeline for the new, new, the recent hires and, you know, just kind of where's the blended rate these days?

speaker
Sam Sidhu
President and CEO

Yep. So the pipeline is still over 2 billion, despite the, you know, I think we called out the, you know, the 400 million just from the new teams. you know, that came in approximately in the first quarter. It's, again, at about 2.5%. It's in the sort of high 20s around, you know, up to 30% non-interest bearing. And it's granular. We continue to be opening up more accounts, waiting for those to fund. So we sort of have, you know, continue to have a parking lot of opened accounts waiting to be funded, a number of accounts where applications are are out. And then finally, I think also importantly, which you may have missed, but just to put a little bit of a bow on it, is that we have a couple of teams already either onboarded or signed up and advanced negotiations with about half a dozen or so other deposit-focused, low-cost deposit-focused commercial banking teams either in expanding into our existing you know, footprint and in some cases also thinking about sort of unique specialty, you know, verticals as well that would be interesting and adjacent products for customers back.

speaker
Steve Moss
Analyst, Raymond James

All right, great. Really appreciate all the color. I'll step back. Thanks, Sam.

speaker
Conference Operator
Operator

The next question comes from Kelly Moda with KBW. Your line is open.

speaker
Kelly Moda
Analyst, KBW

Hey, good morning. Thanks for the question. I would love to follow up again on the deposit pipeline here. Obviously the core deposit growth has been really strong in attestment to your new teams. And you just continue to replenish the pipeline in a way that almost has made it look easy. So I'm wondering, is there a certain point, you know, being a year with the 10 teams having brought in where the overall pipeline so-called low-hanging fruit might start to diminish. I'm sure it's hand-to-hand combat regardless, but just wondering how we should start thinking about that in terms of the outlook here.

speaker
Sam Sidhu
President and CEO

Yep. Thanks. Thanks, Kelly. You know, I wish I could say it was easy. And for those, you know, 152 members that have joined us in the last year or two and the additional 150 or so in our sales teams that have been in hand-to-hand combat for the past couple of years, we commend your efforts such that, you know, our external stakeholders feel that way. I think, you know, I'll start first on the new teams, you know, the newish teams. We talked about venture banking. We expect that to be a two-to-one, you know, deposit-to-loan situation. franchise over time. So I think that speaks a little bit to just the nature of continuing to build and harvest first deposit only customers, then credit customers that are typically net depositors. And then finally, a little bit in the later stage, sort of net borrowers. And that's sort of how we think about the diversification of that business. We also talked about the new commercial teams that were onboarded last year and the size of their books today is less than 20% of where they were when they were onboarded. And even if all of those direct customers don't come back on, they will replenish those books, given the high-performance nature of these teams, the markets in which they serve. And we expect that to happen, call it over about a three-year period, plus or minus. So that hopefully gives you some color there. And then, like I mentioned, we've established ourselves as a top recruiter of talent. I think our employees and team members that join us that find a platform and a franchise that has a single point of contact service model. It has a ton of products and services to support some of your small customers, your medium-sized customers, your large customer needs. And then you complement that with an incentive compensation model that is unique in the industry. And you look at sort of banks of the scale that we are at. You know, we're really the largest, most successful regional bank in sort of recruiting these team members in the markets that we serve. So I think that at the end of the day, we've had an opportunity for many teams that have joined other institutions to have a first look or a last look. And we're really focused on the folks that are going to be the most accretive to adjacency in terms of products and services, adjacency in terms of geographies. and continuing to focus on something that is complementary to what we already have and continue to build these pipelines and continue to transform and remix and also grow our overall deposit franchise.

speaker
Kelly Moda
Analyst, KBW

Great. That's helpful. And maybe flipping to the other side of the balance sheet, with loans, you've grown at a double-digit pace now for the past four quarters. Hoping to get a refresh as to you know, the average size of a loan. I know you have good diversification, so I'm hoping to get a refresh on kind of where that stands as well as where C&I utilization rates are currently and how that compares to recent history. Thank you.

speaker
Sam Sidhu
President and CEO

Sure, absolutely. So I'll give you some ranges. I don't have it for sort of every vertical, but I think predominantly the vast majority of our loan growth has been coming from team members who are new to customers bank, but relationships that are longstanding and in some cases decades long. So sort of our new commercial banking teams have an average loan size of about $6 million. Our venture team is also sort of in that $6 to $10 million range. The CRE side, we've actually closer to about $7.5 million on the CRE side. So extremely granular across the board. And again, these are the major loan categories that we've had, especially over the last two quarters.

speaker
Phil Watkins
CFO

Yeah, and Kelly, good morning. I can jump in on the utilization. Yeah, I would say, again, it obviously varies a bit by business line, as Sam was saying. So as an example, I would say in our traditional C&I, we're not seeing anything sort of unusual from a line perspective. Certain of the verticals, actually, like in our fund finance business, sort of lender finance and capital calls, probably seeing lower than normal utilization. And also with the strong CLO market, we actually saw, I think as you saw in the material, some increased payoffs. And so that's just a sign because our typical take out there is often when they would move to a CLO. So it varies a bit by vertical, but nothing out of the ordinary there.

speaker
Kelly Moda
Analyst, KBW

Great. Last question for me, if I can just flip it in, is on the QBICS deposits, you framed it more as like a payments play. So I'm hoping to get an update as to the fee income contribution there and if that's fully realized or if there's other tweaks you're making that could drive those revenues higher. Thanks a lot.

speaker
Sam Sidhu
President and CEO

Yep. Absolutely. You know, Kelly, so we had, I think the fourth quarter, we'd mentioned $1.9 million on a sort of a full quarter basis. In the first quarter, it was $2.1 million. That's sort of that couple hundred thousand of increase that I was sort of referring to earlier. So we feel we're at a pretty good plus or minus, you know, $8 million run rate. We'd sort of guided to a little bit lower last quarter with a bit of conservatism. you know, at sort of five plus. But I think we feel pretty good about the ramp up there. Again, we are charging traditional commercial banking, you know, fees here, nothing that is out of the ordinary. And our customers have been very receptive.

speaker
Conference Operator
Operator

Great. Thank you so much. I will step back. The next question comes from Matthew Brees with Stevens Inc. Your line is open.

speaker
Matthew Brees
Analyst, Stephens Inc.

Good morning. I was hoping to stay on QBIX. You know, how much of those deposits reside within noninterest bearing? And do you think there's any risk to that, just particularly given the openness of the regulators and inviting banks back into the industry? Do you see any risk of transition of QBIX into, you know, interest bearing deposits? You know, we also know that from other banks in the industry, they tended to command higher betas at some houses. Thanks.

speaker
Sam Sidhu
President and CEO

Sure. Absolutely, Matt. So the answer, again, just to be very consistent is 100% of these deposits are non-interest bearing. And that's really that speaks to the differentiation. I would sort of venture that we have the vast majority of all non-yielding deposits that exist in sort of the US banking industry. So to your point about regulatory clarity and et cetera, I mean, this certainty is really going to bring consistency to the space. It's going to bring in new institutional investors. It's going to increase interest in the asset class. More banks will be interested. Having said that, the banks don't have the network, the technology, the industry knowledge, the know-how, the connectivity, the customer service, the support, the risk management framework, the transaction monitoring that we have. Banks are expected to enter and we think it very much legitimizes the industry and further strengthens the controls around the industry. And with that, you know, comes with that comes greater interest with that comes a bigger pie. And so we will, you know, expect to have an actually welcome, you know, more banks in the industry. Having said that, you know, we're going to. continue to be the primary transactional operating account. And as they enter, the pie will also be growing. And again, like I said earlier, I think the really important thing is we have about 1% of the liquidity.

speaker
Matthew Brees
Analyst, Stephens Inc.

Got it. And are there any updates? Historically, you've had about a 15% cap. Has that been updated in any way? Is there a cap in place or does it still remain in flux?

speaker
Sam Sidhu
President and CEO

Yep. Good question, Matt. So $3.3 billion sitting where we are at $3.31 is about 17%, so above the old cap. When we set that initial cap back in February of 23, we didn't have a policy to hold all these deposits in cash. But since we have since that time been holding all of these deposits in cash, we thought it was prudent to make sure we're there to support our customers and no longer have that liquidity risk concentration cap.

speaker
Matthew Brees
Analyst, Stephens Inc.

Okay. And then on the securities repositioning, did, you know, any of what was sold, you know, because we've talked a little bit about the, you know, the credit risk here, did any of what was sold include the consumer installment loans that were securitized? I believe back in 2023. And if not, could you just remind us how much of the securities book are the securitized installment loans? I know they had a shorter license duration.

speaker
Sam Sidhu
President and CEO

Yep. Um, So they do not exist. This has nothing to do with anything on the consumer side. Those are actually sitting in our HTM portfolio. It was over a billion plus or minus at the various stages, and it's down to a couple hundred million, I think less than 400 million today, and performing incredibly well with credit enhancement and no issues.

speaker
Matthew Brees
Analyst, Stephens Inc.

Understood. So what was the, I think you had mentioned TLOs, what was the underlying nature of the collateral that was sold?

speaker
Phil Watkins
CFO

Yeah. Hey, Matt. As outlined, about 45% of it was corporates. 40% of it, the ABS was CLOs and non-agency CMBS. And then there was about a 15% tranche that was unrated privates. And again, as I mentioned, on that tranche, everything remaining is AAA, essentially takes down the CLOs, and the remaining CMBS is agency-backed.

speaker
Matthew Brees
Analyst, Stephens Inc.

But underneath the non-agency CMBS, was it office or multifamily? What was it that was driving the credit mark?

speaker
Sam Sidhu
President and CEO

Well, Matt, to be clear, these are AOCI marks, which include interest rate risk marks. They include credit spreads and credit marks. So it's a broad base. I don't have the specific breakout in front of me. I don't know if you do, Phil. Phil also says he doesn't have the specifics on that. But But really, I think the important here is what's remaining in corporates is predominantly investment grade. No more real CLOs, essentially all sold. And on the CMBS side, what we have is now all agency-backed Ginnie Mae. And on the CMO side, what we exited was unrated privates, and what's remaining is AAA.

speaker
Matthew Brees
Analyst, Stephens Inc.

Okay, understood. I'll leave that there. The last question I had is just, you know, we're now just tripping over the two-year period. You know, mile marker post March Madness of 23. Does that mile marker represent any sort of significant, you know, milestone in terms of expiration of employee lockup agreements that'll provide additional hiring opportunities? You know, is anything kind of broken loose just because of timing? Thank you.

speaker
Sam Sidhu
President and CEO

Yeah, Matt. So the short answer is yes. The long answer is, you know, is actually interesting for customers banks. So yes, they're about two years sort of, you know, agreements for some of the institutions that were majorly impacted, you know, in March, which is sometime in this quarter or early next quarter. Having said that, I think that the opportunity we had last year to really pick off what we felt were the top 10 teams that were you know, available to us. We had an opportunity, as you can probably appreciate, to evaluate significantly more at that time and since then. And like I said, we really do have an opportunity to have sort of a first look and last look. So, yes, we may have additional team or two that is incredibly high quality that hasn't necessarily moved around because moving around creates disruption in the client experience and service of a different logo every year. But what's really important about the bank is that the vast majority of the teams that we're talking to are not from the types of banks that you're referring to that had backups. They're actually coming from folks, high-quality teams, market presidents, state or geographic leaders are reaching out to myself, our chief banking officer, and many of our senior executives, and wanting to join customer bank, want to join a high-performing team, want sort of the depth of the products and services, the technology, and the incentive compensation model that we offer.

speaker
Matthew Brees
Analyst, Stephens Inc.

Got it. I appreciate all that clarity. I'll leave it there. Thank you.

speaker
Conference Operator
Operator

The next question comes from Hal Goetsch with B. Reilly Securities. Your line is open.

speaker
Hal Goetsch
Analyst, B. Riley Securities

Hey, thank you. My question is on the teams and maybe the pipeline of new professionals you can add. obviously when you hire experienced teams, they're going to bring over existing clients. And that's an immediate impact maybe in the first 12 to 18 months. But like, could you show us your expectations on what those teams that are highly competent, you know, kind of bring in years two, three, and four, are they still building their book of business? And is that an expectation of their agreement to come over? Tell us a little bit more about this, how this works and how the runway it gives you when you hire a team, not just in year one, but beyond. Thanks.

speaker
Sam Sidhu
President and CEO

Sure, absolutely. Thanks for the question, Hal. So because of some of the market volatility and disruption and bringing on teams en masse, I think we're a little bit spoiled by our success in a short period of time just because customers were a lot more receptive to moving. Breaking even in less than a year is really quite an incredible accomplishment, especially given the scale of the investment that we made last year. So As I mentioned earlier, we expect these teams will continue at a similar type pace. They're at about 100 million plus or minus on an average month over the course of the year. There are obviously some typical months that are a little slower, like a January or an April as an example. But at least at that type of level, then we have sort of venture banking continuing to contribute over time. We expect sort of maturity to happen over a three to five year period. And then that sort of becomes more sort of maintaining and servicing your overall client base. And then pivoting to as we look at new teams, having said sort of that related to the success that we had over the last year, we're still looking at about a year or less break even on the teams that we're looking to bring in. And while you may not have sort of the big pops that we've had over the past year, you'll continue to have about that three-year plus or minus trend. you know, of rebuilding a portfolio of about the size that, you know, you as a team leader and you as a team member used to sort of maintain and service at your prior institution, even if the constitution of that portfolio may be only 60, 70% the same as it used to be.

speaker
Hal Goetsch
Analyst, B. Riley Securities

If I could ask one follow-up, I didn't want to have to bring up the T word, but like every conference call I'm on and payments and FinTech and banking is how are tariffs impacting? You know, I'm pleased to see that the word wasn't even really mentioned. And then look at your business lines in commercial, in venture banking, fund demands, healthcare. Would you rate your exposure to, you know, tariffs is basically mostly just broad economically or secondary or tertiary, or you really don't have, say, I don't know, manufacturing clients or might be tied up and locked down and uncertain about production schedules that might require lending right now. Could you give us your thoughts on your, Direct exposure then, and then maybe your thoughts on indirect exposure to tariffs.

speaker
Sam Sidhu
President and CEO

Yeah, Hal, absolutely. I think that the short answer is absolutely what you described. This is de minimis, direct exposure to tariffs. And we have very... You know, low, you know, thankfully, you know, sort of balances and verticals that would have, you know, exposure in a very short term basis. But as you rightfully said, sort of in a medium to longer term basis, there are, you know, credit sensitive portions of any bank's portfolio that could have, you know, potential sort of de minimis, you know, exposure in a mild, you know, type recession. And I really think that while the R word is continuing to be used at the end of the day, this is sort of a policy driven, you know, commercially, sorry, politically, you know, sort of policy driven economic macroeconomic type effort. that volatility can be created in a number of weeks. It can also be rolled back in a number of weeks, and it would be a shame for anything, you know, beyond a perception of a mile to even be on the table. But our hope is that, you know, our administration policymakers, you know, have things, you know, in place under control, and we expect there to be some stability with clarity. At the end of the day, market volatility comes from a lack of clarity, and we are seeing the beginnings of at least confidence in clarity, and hopefully clarity will come soon.

speaker
Hal Goetsch
Analyst, B. Riley Securities

I appreciate you for that. Thank you.

speaker
Conference Operator
Operator

This concludes the question and answer session. I'll turn the call to President and CEO Sam Sidhu for closing remarks.

speaker
Sam Sidhu
President and CEO

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

speaker
Conference Operator
Operator

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

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-