Earnings Call Transcript - CUBI Q1 2025

Operator, Operator

Hello, and welcome to the Customers Bancorp 2025 First Quarter Earnings Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I'll now turn the conference over to David Patti. Please go ahead.

David Patti, Chairman

Thank you, Sarah, and good morning, everyone. Thank you for joining us for the Customers Bancorp's earnings webcast for Q1 2025. The presentation deck you will see during today's webcast has been posted on the investor's web page of the bank's website at customersbank.com. 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 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 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 Bancorp chair, Jay Sidhu. Jay?

Jay Sidhu, Chairman

Thank you, David Patti, and good morning, ladies and gentlemen. And welcome to Customers Bancorp's First Quarter 2025 Earnings Call. Joining me this morning are President and CEO of the bank, Sam Sidhu, and Customers Bancorp 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 the stance 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. Third, improved efficiency with execution of our operational excellence initiatives. And last but not 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, a 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 flexibility and remain responsive to changes in this evolving external environment. Importantly, our customer-centric mindset and commitment to service provided by our very experienced colleagues position us well 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 offerings 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 a 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 is 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, with this entrepreneurial mindset allowing 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 have welcomed well over a hundred 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 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, 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. With the investments we are making in risk management, we will have 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 highly regarded by our clients, and we will never take our eye off of this. Next, we have keen awareness of the external environment, along with significant investments in new products and technology. We continually improve upon that, and we maintain 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?

Sam Sidhu, President and CEO

Thanks, Jay. 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 is down 64 basis points from their high in Q3 of 2024. For the second quarter in a row, our commercial teams excluding Cubix had nine-figure noninterest 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. Much of the growth came from our bankers bringing over their long-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 available-for-sale portfolio to fund this growth. We feel even better about the balance sheet optimization decisions we made based on recent market developments. At this point, you should not expect any additional securities reposition 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 Total Capital ratio increased to 7.7%. Our coverage of immediately available liquidity to uninsured deposits is robust at 55%. Our nonperforming assets ratio remains low at 26 basis points, well below peer averages, and reserves to nonperforming loans are strong at 324%. Advancing to slide six, you'll see our GAAP financials, and 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 $1.50 in the quarter on net income of $50 million. This represented core return on common equity and return on assets 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 shined 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 helped reduce our deposit costs as we remix these deposits, providing about a 200 basis point interest expense benefit. 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. Noninterest 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 noninterest bearing deposits. Over the last two quarters, that is now nearly $400 million of noninterest 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, our pipeline continues to rebuild. Even with this quarter's strong deposit performance, our go forward low-cost granular deposit pipeline has been replenished at over $2 billion and growing. 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 2023, just months after the banking crisis, we took that business to the next level by acquiring a loan portfolio from the FDIC and bringing 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've significantly expanded our presence in the market, achieving more than a fivefold 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. 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 makes Customers Bank a destination for relationships-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 are on the way. 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 held-for-investment loan growth, which was well diversified across our platform. 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 comprehensive deposit-led relationships. As an example, over the last three quarters, we've had nearly $500 million of self-funded net loan growth in commercial real estate, which as you can appreciate is typically unheard of. 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 market. This growth is achieved with discipline, as 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 leaned 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. Thanks, Sam, and good morning, everyone.

Phil Watkins, CFO

Turning to slide 11, I'd like to walk through our net interest income and margin performance. We continue to reflect the strength of our balance sheet strategy and disciplined execution. In Q1, we delivered $167.4 million in net interest income, and our net interest margin expanded to 3.13, 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. 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 noninterest expenses. We are incredibly proud of our performance on efficiency this quarter. In Q1, our core noninterest expense declined 5% to $103 million. That decline came even as we continued to invest in technology, talent, and our risk management infrastructure. Our core efficiency ratio improved to 52.7% with noninterest 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 achieved 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 Cubic's 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 noninterest 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 opportunities 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 book value per share ended the quarter at $54.74, up more than $5.5 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 tangible book value per share, even while navigating a global pandemic, inflationary rate shock, and a regional banking crisis. We are 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 tangible common equity 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. Nonperforming assets remained low at 26 basis points of total assets, and reserves to nonperforming loans 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.

Sam Sidhu, President and CEO

Thanks for that, Phil. As we look ahead for the rest of 2025, though there is increased market volatility, we are 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, this is largely due to 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 the deepening of relationships within our client base. Net interest income is projected to grow between 3% to 7% year over year. As a reminder, we had larger accretion income in 2024, so this equates to 6% to 10% on a normalized basis. Our deposit remixing efforts and strong loan growth position us well to drive net interest income expansion regardless of the rate environment. On the back of the success and outperformance of our operational excellence initiatives, we are on track to achieve our core efficiency ratio target in the low to mid-fifties for the full year. 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 the first quarter, 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. We maintain strong credit metrics. What stands out is not just 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.

Operator, Operator

Thank you. If you would like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 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 Schiraldi with Piper Sandler. Your line is open.

Frank Schiraldi, Analyst

Good morning. Just in terms of the new banking teams, the deposits coming over, Sam, sounds like that's still 25%, and that's still kind of the expectation going forward. Just curious if that's the case. The offset in the quarter in terms of noninterest bearing is that just continued general pressure to move some funds and get some return overall.

Sam Sidhu, President and CEO

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

Frank Schiraldi, Analyst

Okay. And then just as a switching gears as a follow-up, in terms of the restructuring in the quarter, is there any does this kinda do it in terms of yeah. 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 kinda do it for any credit-sensitive instrument within the investment securities book at this point?

Phil Watkins, CFO

Yeah. Hey, Frank. Good morning. As Sam said, we don't see anything else that we would do on the restructuring front. Just a little bit more detail, we provided some detail on the back, about 45% were corporates, which takes that down in about half. The remaining predominantly investment grade, 40% of it was ABS. That was really CLOs and non-agency CMBS. Essentially, all of our CLOs that takes down essentially all of our CLOs. The remaining CMBS is agency-backed. The CMOs were unrated privates. What's remaining is triple-A.

Sam Sidhu, President and CEO

It's as Phil mentioned, it was really more of a derisks exercise, to support our loan growth. This was about balance sheet optimization. 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 hence that was our focus on the asset side of the balance sheet.

Frank Schiraldi, Analyst

Okay. Fair enough. Thank you.

David Bishop, Analyst

Yes. Good morning, gentlemen.

Sam Sidhu, President and CEO

Good morning, David Bishop. I'm curious, Sam, we've seen some good growth here lately, especially on the commercial real estate side. Remind us of the capacity to grow commercial real estate lending, both on the non-occupied in the multifamily space. You still have plenty of capital room. Correct? That's right, David. We talked about being under 200%, a 90% plus or minus, and that quarter over quarter despite our loan growth typically stays flat. So, we have a ton of capacity compared to peers that are in sort of the three to 500% range in our markets. What's really interesting is the self-funded nature of our growth with real estate deposits is the interesting part. I mentioned our spread is about 4.4%.

David Bishop, Analyst

Got it. And then maybe on the income statement, you noted 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 $33 million plus run rate? From a tech spend perspective, is this a good run rate for the technology expenses, or will it be more investment?

Sam Sidhu, President and CEO

Yeah. Hey, David. On 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 rate to answer your question. I'd caveat that by just saying that these are the successes of what we laid out in the middle of 2022, building our treasury management platform and our Cubic platform, rolling it out to our larger corporate clients and seeing the results. So I think that we're sitting at a pretty good run rate today. On 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.

David Bishop, Analyst

Got it. And, final question. Curious, saw the continued decline in the cost of deposits It was $2.82. Do you have the spot cost at the end of the quarter? Thanks, and I'll hop back into the queue.

Sam Sidhu, President and CEO

It was at $2.82. So spot is the same as the average.

Steve Moss, Analyst

Good morning.

Phil Watkins, CFO

Good morning, Steve Moss.

Steve Moss, Analyst

I apologize. I hopped on late, so if you addressed this, I apologize. But in terms of the Cubix deposits here, it sounds like I think you said $300 million down quarter over quarter. Just kind of wondering, what you're thinking for those balances, if you're going to grow them over time here. And just maybe talk a little about where you see the opportunity going forward.

Sam Sidhu, President and CEO

Yep. Sure. So they were at $3.03. I think what's important is that the average was also $3.03. Again, these are payments deposits. As a reminder, they're held entirely at 100% in cash. We think about the spot versus average; they typically oscillate between a 10% band. 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 support our entire institutional network base of all our digital asset customers. If our customers need additional deposit headroom related to their operating transactional accounts, we will support that. We are holding these all in cash. It's not necessarily something we're looking to lean into and increase deposits because this is really payment flow. One of the things that I think is underappreciated is that we've built this proprietary technology platform that the industry relies on. We hold about 1% of the liquidity in the digital asset industry. A lot of the deposits are actually held at larger banks and by asset managers. We hold the operating transactional accounts, and there's yield received on those accounts.

Steve Moss, Analyst

Great. I appreciate all the color there. And then in terms of the loan growth front, I guess the guide strikes me as conservative here given the quarter. I'm assuming you just kind of a little bit uncertain in your outlook makes you reluctant 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.

Sam Sidhu, President and CEO

Yep. Absolutely, Steve. If you had asked us on April 2, which is when we all sat down, it was a Wednesday. We had a very different outlook compared to what we saw that afternoon. So, yes, there is volatility. Having said that, the backlog is what we want to focus on as opposed to the pipeline. Pipelines remain strong, consistent with the macro sentiment we've heard across the industry. Backlog is also strong and stronger than what we would have expected with the first quarter. The diversification over the last couple of quarters allows us to share a much more granular breakout of the loan growth coming by vertical. It's important to contextualize against the portfolio remix we've put together. We are really proud of those efforts, and this is a unique differentiated model that delivers organic low-cost commercial deposits and complements that side of the balance sheets resurgence and growth.

Steve Moss, Analyst

Right. Okay. Appreciate that color. Then maybe just one last one for me. I assume you probably said this in your prepared remarks, and I missed it. But just where is the deposit pipeline for the new hires? And where is the blended rate these days?

Sam Sidhu, President and CEO

The pipeline is still over $2 billion despite the previous mention of the $400 million from the new teams that came in during the first quarter. It's about 2.5%. It's in the high twenties to around 30% on interest bearing. It's granular. We have been opening more accounts, waiting for those to fund, and we have a parking lot of open accounts pending.

Kelly Motta, Analyst

Hey. Good morning. Thanks for the question. I would love to follow up again on the deposit pipeline here. The core deposit growth has been really strong and a testament to your new teams. I'm wondering if there’s a certain point, being a year with the 10 teams having brought in, where the overall pipeline and so-called low-hanging fruit might start to diminish. I’m sure it's hand-to-hand combat regardless, but just wanting to hear your thoughts on that.

Sam Sidhu, President and CEO

Thanks, Kelly. I wish I could say it was easy. For those 52 members that have joined us in the last year or two and the additional 50 or so in our sales teams that have been in hand-to-hand combat the past couple of years, we commend their efforts such that our external stakeholders feel that way. Based on the new teams, we expect a two-to-one deposit to loan franchise over time. The new commercial teams onboarded last year have an average loan size of about 6 million; our venture team also 6 to 10 million. CRE is closer to 7.5 million. Extremely granular across the board. We expect the size of their books today is less than 20% of where they were upon onboarding. Even if all those direct customers don't come back, they will replenish those books due to the high-performance nature of these teams and markets they serve. We expect that to happen over about a three-year period. We've established ourselves as a top recruiter of talent, and while we may not have the big pops that we've had over the past year, you'll have a three-year average of rebuilding a portfolio of about the size the team leads.

Kelly Motta, Analyst

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. I’m hoping to get a refresh on where that stands as well as where C&I utilization rates are currently and how that compares to recent history.

Sam Sidhu, President and CEO

Sure. Absolutely. The majority of our loan growth has been coming from team members who are new to Customers Bank. Our new commercial banking teams have an average loan size of about 6 million. The venture team is also in that 6 to 10 million range. The CRE side is around 7.5 million. These are major loan categories we've had, especially over the last two quarters.

Phil Watkins, CFO

In our C&I, we're not seeing anything unusual from a line perspective. Certain verticals, like in our fund finance business, are seeing lower than normal utilization. With the strong CLO market, we have seen some increased payoffs, which is a sign since our typical takeout often moves into a CLO.

Kelly Motta, Analyst

Great. Last question from me, if I can flip it in, is the Cubix deposits; you've framed it more as a payment space. I’m hoping to get an update as to the contra fee income contribution there and if that's fully realized or if there are other tweaks you're making that could drive those revenues higher?

Phil Watkins, CFO

We had, I think, in the fourth quarter we mentioned $1.9 million. In the first quarter, it was $2.1 million. That's a couple hundred thousand increase that I was referring to earlier. So we feel we’re sitting at a pretty good run rate. We're charging traditional commercial banking fees, and our customers have been very receptive.

Matthew Breese, Analyst

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

Sam Sidhu, President and CEO

Sure, Matthew. A percentage of these deposits are noninterest-bearing. This speaks to our differentiation. I would venture to say we have the majority of all nonyielding deposits that exist in the U.S. banking industry. To your point about regulatory clarity, etc., this certainty will bring consistency in the space, attract new institutional investors, and increase interest in the asset class. More banks will be interested. We think it legitimizes the industry and further strengthens controls around it. With that, we will continue to be the primary transactional operating account.

Matthew Breese, Analyst

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

Sam Sidhu, President and CEO

Yep. Good question, Matthew. The cap sitting where we are at $3.3 billion is about 17% above the old cap. Since we set that initial cap back in February 2023, we've been holding all these deposits in cash. We thought it was prudent to support our customers and no longer have liquidity risk concentration caps.

Matthew Breese, Analyst

Okay. Understood. So what was the I think you mentioned CLOs. What was the underlying nature of the collateral that was sold?

Phil Watkins, CFO

Yeah. As outlined, about 45% of it was corporates. 40% of it was CLOs and non-agency CMBS, with about a 15% tranche that was unrated privates. Everything remaining is triple-A, and we essentially took down all of our CLOs.

Matthew Breese, Analyst

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

Sam Sidhu, President and CEO

To clarify, these are marks that include interest rate and credit spreads. I don't have the specific breakdown in front of me. The important thing is that what's remaining in corporate is predominantly investment grade, and we have exited essentially all CLOs. The remaining CMBS is all agency-backed.

Matthew Breese, Analyst

Got it. And then to wrap this up, we've just hit the two-year mile marker post-March Madness of '23. Does that represent any significant milestone in terms of the expiration of employee lockup agreements providing additional hiring opportunities?

Sam Sidhu, President and CEO

Yes, Matthew. The short answer is yes. The long answer is interesting for Customers Bank. Lockup agreements typically conclude this quarter or next quarter. Last year, we had the opportunity to pick off top teams that were available to us. We can evaluate significantly more at that time and since then. We have a first look at high-quality teams who are reaching out to join Customers Bank. We are the largest, most successful regional bank focused on recruiting these team members in our served markets.

Hal Goetsch, Analyst

Hey. Thank you. My question is on the teams and maybe the pipeline of new professionals you can add. When you hire experienced teams, they bring over existing clients, and that's an immediate impact, maybe in the first twelve to eighteen months. Can you show us your expectations on what those teams, highly confident, will bring us 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?

Sam Sidhu, President and CEO

Absolutely, Hal. We've had market volatility and disruption, but customer receptiveness has allowed us to accomplish breakeven in less than a year. Particularly, we expect these teams to continue at a similar pace. They're at about a hundred million plus or minus on average monthly throughout the year. Breakeven happens within a year for teams we bring in. While large pops may not happen, we expect a three-year average for rebuilding a portfolio size that team members use to maintain.

Hal Goetsch, Analyst

If I could ask one follow-up, I'm pleased to see that the question of tariffs wasn't even mentioned. In my experience, every conference call I join in payments, fintech, and banking does mention tariffs. I look at your business lines in commercial, venture banking, fund finance, and healthcare. Would you raise your exposure to tariffs as a broad economic concern? You really don't have clients tied to manufacturing, who might be locked down and uncertain about production schedules?

Sam Sidhu, President and CEO

Absolutely, Hal. The short answer is, we have de minimis direct exposure to tariffs. We have very low balances and verticals with direct exposure in the short term. In the medium to longer term, some credit-sensitive portions could have potential de minimis exposure during a mild recession. While the word recession is ongoing, this is a politically driven economic effort where volatility will shift. Our hope is that stability and clarity will come soon.

Operator, Operator

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

Sam Sidhu, President and CEO

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

Operator, Operator

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