CUBI - NYSE

Thank you for standing by. My name is JL, and I will be your conference operator today. At this time, I would like to welcome everyone to the Customers Bancorp, Inc. Q1 2024 Earnings Call. [Operator Instructions] I would now like to turn the conference over to David Patti, Communications Director for Customers Bancorp. You may begin.

Thank you, JL, and good morning, everyone. Thank you for joining us for the Customers Bancorp Earnings Call for the First Quarter of 2024. 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 24 results and click download presentation. You can also download a PDF of the full press release at that 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 is my pleasure to introduce Customers Bancorp Chair, Jay Sidhu. Jay?

Thank you, Dave, and good morning, ladies and gentlemen, on this beautiful spring morning. Welcome to Customers Bancorp's 2024 First Quarter Earnings Call. Joining me this morning are President and CEO of Customers Bank, Sam Sidhu, and Customers Bancorp, CFO, Phil Watkins. Please join me in welcoming and congratulating Phil on his promotion to Customers Bancorp CFO. We want to thank Carla Leibold, our former CFO, for her years of service and wish her well. I will provide some introductory comments and then my colleagues will provide details of the quarter. At the conclusion of our prepared remarks, we look forward to answering your questions. Let's move to Slide 3. Before we address our first quarter results, I just wanted to take a moment to briefly recap some of our positive trends over the past few years. And one very significant activity that we announced in the recent press release, which we expect to have a material positive impact on our future performance. In our presentation last quarter, we highlighted the delivery on the promises we made to you 5 years ago, across items like capital, tangible book value growth, profitability, and risk management. While I won't go through all of them, I will highlight the incredible effort and results from our team members as we continue to strengthen our franchise, especially transform our deposit franchise. While we have made significant strides, especially in 2023, our opportunity in 2024 looks even stronger. On that note, we are incredibly excited about the recent announcement we made about hiring 10 new high-performing business and commercial banking teams from legacy Signature Bank. We expect this will accelerate the execution of our strategic priorities, especially helping to make -- take the quality of our deposit franchise to the next level. These teams have an incredible track record with decades of experience working together, serving an awesome client base. We are so excited to welcome our new colleagues and their business to Customers Bank and providing both with a platform to succeed. We had another extremely strong quarter of business unit deposit growth exceeding $1 billion, which we again used to reduce our wholesale certificates of deposits. Our capital levels continue to strengthen with TCE/TA ratio increasing to 7.3% and our CET1 ratio increasing to 12.5%. We have confidence in our ability to achieve the 7.5% TCE/TA very soon. And we had established that goal earlier in the year, and we expect to put some excess CET1 capital to work with relationship-based loan growth this year. Asset quality remains very strong and our NPA ratio at 17 basis points and we have ample reserve coverage. We remain very optimistic about the year with strong and growing loan and deposit pipelines. We are in an enviable position to continue to take market share, and our new business and commercial banking teams serve to further accelerate and enhance those prospects. Let's move to Slide 4. Again, we reiterate our priorities to you, which broadly remain unchanged. We will continue to maintain a roughly flat balance sheet in 2024; however, we will execute disciplined loan growth of 10% to 15%, in line with our previous guidance and focused on holistic client relationships. In fact, our loan growth in April alone exceeded our entire Q1 loan growth. Beginning on Slide 5, you can see some of the key metrics we focus on and which we believe differentiate the top-performing banks. These include growth in revenue, EPS and tangible book value per share. We have recorded more than 15% annualized growth on each of these metrics over the last 5 years, and revenues have grown 2x the expenses. We have accomplished this performance without raising a single dollar of common equity and diluting our existing shareholders. I want to express our gratitude and thanks to all the team members that make up Customers Bancorp for their hard work and dedication to serving our clients. Our people are what drives Customers Bank success as they work day in and day out to make our customers say, "Wow." I know our new team members are totally aligned to that vision as Sam and I have had the opportunity to meet each and every one of them over the last several weeks. Before I pass the call on to my colleagues, I also want to welcome Kelly Motta to the call. Kelly joins from KBW, where she recently assumed coverage of Customers Bancorp, and we look forward to collaborating and working with Kelly going forward. With that, I'll turn it over to Sam to cover the key activity and results of the quarter in much more detail.

Thanks, Jay, and wishing everyone a good morning as well. Moving to Slide 6. As we reflect back on the 1-year anniversary of the events of March of 2023, while the banking industry has faced tremendous headwinds, Customers Bank was able to capitalize on the challenges and has emerged as one of the biggest beneficiaries of the disruption. We have been able to take advantage of opportunities because we were already well positioned heading into the events, having laid the groundwork in 2022 across key safety and soundness metrics like interest rate risk, credit risk and liquidity, having already diversified and repositioned our securities, loan and deposit portfolios. After ensuring our customer and deposit base was sound, we quickly pivoted to offense and bid on multiple processes with the FDIC and just weeks following the outset of the crisis, we were awarded the venture banking loan portfolio from the FDIC at a substantial, but fair discount. We were also able to capitalize on the opportunity to fill the void left in the wake of the bank failures last year, which has put both customers and teams in motion, in specific verticals in which we had already established expertise and brand recognition. To put the size of the deposit disrupted opportunity into perspective, remember these banks had collectively over $500 billion in total deposits. Even if you assumed all of our $4 billion of deposit business unit growth over the last 12 months came from these banks, it would still only represent less than 1% of those deposits. And all along the way, we have been adding exceptional talent, whether that was with our venture banking team, creating national client coverage, or the recruitment of our Chief Credit and Marketing Officers or the head of our treasury management from much larger institutions. The key is we have remained on our front foot despite industry setbacks, which brings me to the significant opportunity which presented itself in the first quarter of this year to onboard 10 new banking teams, which I'll cover more on the next slide. We've been talking about our desire to continue on our trajectory of adding commercial deposit-focused banking teams for some time now. We're thrilled to let you know that what started as a recruitment effort of a few strong top deposit teams beginning last year, eventually transitioned to an application process of top New York City Metro and West Coast banking teams, which we previously announced. The end result is that we've been able to onboard what we believe to be the top available teams in the New York and West Coast regions. These banking teams had many options when selecting the best bank to serve their clients and opted to join Customers Bank for a number of reasons. We share a similar, single point of contact, client-centric mindset that these bankers historically applied to build their long-standing relationships. We have an entrepreneurial culture and offer them a platform with the products, services and technology to provide the highest level of service to their clients. And we continue to have some of the best strength and financial performance in the industry, which has been important to teams as well as their customers. The teams had well in excess of $10 billion in deposit balances before the crisis and thousands of clients. Let me repeat that, they had well over $10 billion in high-quality deposit portfolios. We feel strongly that they will be able to replicate their success over time at Customers Bank. While we're making significant investment in the teams, we expect it to drive meaningful franchise value through the addition of substantial amount of high-quality, low-cost, primary relationship-based and granular deposits. We expect this investment will increase our payroll expense by about $8 million to $10 million per quarter. However, we expect incremental revenues to fully offset these expenses within 12 months, which is a very attractive return on investment. We believe that there will be meaningful net interest margin benefits, mainly through reduced interest expense from remixing deposits. We expect this to provide significant EPS accretion of about 10% in 2025, and we expect to achieve this while continuing to deliver double-digit tangible book value per share growth. The opportunities we capitalized on over the past several years and in '23 were exceptional. Jay already highlighted the incredible returns that we had for our company and shareholders and we are even more excited about our current prospects with these teams in 2024 and beyond. Moving to Slide 8. Here, we provided the quarter's financial highlights on a GAAP basis. And on Slide 9, we have provided on the core and adjusted basis. In the quarter, we earned $1.40 in GAAP EPS on $45.9 million of net income. Adjusted core EPS was $1.68 on $55 million of net income and our adjusted core ROCE and ROA were 14.5% and 1.11%, respectively. As you heard from Jay, credit quality remains strong as evidenced by our NPA ratio of just 17 basis points. Moving to Slide 10 and the strength of the franchise. As you heard from Jay, we once again generated business unit deposit growth of about $1 billion for the fourth consecutive quarter. We once again used this production to repay higher-cost wholesale CDs. We experienced growth in multiple commercial verticals, including mortgage finance, fund finance and our New York and venture banking teams, who opened more than 800 commercial accounts in the quarter. We continued with our positive noninterest-bearing mix shift and increased these deposits by $266 million in the quarter and increased the percent of total deposits now up to 26%. We continue to focus on the stability of the deposit franchise as uninsured, collateralized and affiliate deposits ended the quarter at 78% of total deposits. The growth we achieved was a team effort across the franchise. Once again, more than 20 of our deposit channels saw growth in the quarter. About half of these deposit channels experienced growth of $25 million or more, demonstrating the broad-based nature and quality of our deposit transformation. Now let's move to Slide 11. Here, we highlight the success we had in generating growth in business unit deposits as well as the deemphasis in wholesale funding. Over the past 12 months, we reduced the amount of wholesale CDs by 66% and borrowings by over 40%. Wholesale CDs as a percentage of total deposits dropped by 20 percentage points and borrowings as a percent of total liabilities are down by 5 percentage points. These now stand at 10% and 8%, respectively, in line with industry averages despite our branch-light business model. We are incredibly proud of the reduction we've achieved in such a short time frame that under normal circumstances could take as much as a decade or require disruptive and dilutive M&A in an effort to achieve sooner. Despite another quarter of over $1 billion of success, our deposit pipeline has been more than replenished to over $2 billion, which we would expect to be onboarded this year. And we expect our deposit pipeline on a go-forward basis to be continuously replenished at these levels. While the opportunity remains to further reduce some higher-cost wholesale CDs, going forward, we see an excellent opportunity to start remixing higher cost business unit deposits with more attractively priced and granular deposits. With the wholesale funding transformation nearly complete, let's turn to Slide 12, where I'll expand on the next phase of our deposit transformation. Our existing channels continue to have strong momentum and have replenished pipelines despite strong continued performance in the first quarter. As you heard, this has been led by our venture banking fund finance and New York Community and banking teams. While it's too early to provide specifics on what our new business and commercial banking teams can deliver for our bank and investors, we want to share a loss-driven analysis of potential outcomes. Pipeline balances from our business and commercial banking teams will have a healthy noninterest-bearing DDA mix, which we will use to pay off higher cost deposits. Reducing remixed interest-bearing deposit costs by a blended rate between 150 to 250 basis points is realistic and if achieved, would have a meaningful impact on our net interest income as well as our cost of interest-bearing and total deposits. This NII impact here assumes we continue to keep the balance sheet and our deposit flattish and excludes the eventual benefit of ultimately deploying excess liquidity into loans. This demonstrates the strength of the customer relationships of our new business and commercial banking teams and why we are confident in the investments required to bring these bankers into Customers Bank. Just as importantly, the granularity of these deposits will significantly improve the strength and the value of our deposit franchise. With that, I'd like to turn the call over to Phil to provide additional detail.

Thanks, Sam. I'll start on Slide 13, where you can see that while total HFI loan balances remained relatively flat, up about $60 million in the quarter, we had over $200 million of growth in our corporate and specialized banking verticals, which is about 13% on an annualized basis. This was partially offset by maturities and prepayments in our community banking verticals and the continued tactical runoff of our consumer installment HFI portfolio. Our loan pipelines are extraordinarily robust and will only grow with the new banking teams. Our outlook of 10% to 15% loan growth in 2024 remains intact. We have clear visibility into a pipeline of more than $500 million getting booked in the second quarter, and we're seeing and converting great opportunities across the franchise. On Slide 14, we tried to provide more information than usual around our NII drivers to help walk the NII bridge. As you may recall, loans and securities were reduced by about $1 billion late in the fourth quarter as we allowed some less strategic assets to roll off. As a result, interest income declined in the first quarter due to overall lower balances of these higher yielding interest-earning assets. For the second quarter in a row, we had a decline in our interest expense. Our total cost of funding remained roughly flat during the quarter, helped by the lower level of average FHLB advances outstanding. The reduction in interest earning asset balances I mentioned, coupled with strong deposit activity resulted in higher average cash balances, which also contributed to a decline in our NIM. This was largely due to the measured pace of replacing the loans that exited late in Q4 with net originations of higher-yielding loans. We remain disciplined, extending credit for holistic relationships and we also reserve balance sheet capacity for the new teams. Additionally, we had the full quarter impact of replacing the service deposits that were classified as noninterest-bearing with interest-bearing deposits. We remain confident in our ability to achieve our full year NIM target given our liquidity position and the strength of both our loan and deposit pipelines and expect meaningful expansion from here with or without a change in rates by the Fed. Moving on to Slide 15. We'll discuss some of the components of our first quarter expenses and 2024 outlook. Our adjusted core noninterest expenses decreased to roughly $87.5 million. We incurred a $500,000 increase to the estimated industry-wide FDIC special assessment due to last year's bank failures. We also recorded an $11.3 million of expense in the first quarter for items that related to periods prior to 2024, which will not be in our run rate expenses going forward. Finally, as Sam previously mentioned, the new banking teams will add roughly $8 million to $10 million to our quarterly expense base and while this will temporarily elevate our efficiency ratio, we expect incremental revenues to fully offset these expenses within 12 months. We had made significant investments over the last few years, building out our infrastructure to be prepared for such an opportunity. We made these investments with the foresight that they would be necessary to take the franchise to the next level. We believe it's prudent to invest in the business in a disciplined way to generate long-term shareholder value. We have always committed to only making investments that generate revenue of at least 2x expenses over a reasonable time period. We expect this banking team expansion to meet that criteria and then some and should enable us to return to a mid-40s efficiency ratio over the medium term and keep our noninterest expense to average asset ratio at a best-in-class level for the industry. Turning to Slide 16. The strategy has not changed in terms of our focus on maintaining robust levels of liquidity. Combined cash balances and immediately available capacity from the FRB and FHLB increased by about $400 million during the quarter. Our coverage of immediately available liquidity to uninsured deposits is extremely robust at 224%. These levels of liquidity compare favorably to almost anyone in the industry. Also looking at other metrics like loan to deposit and borrowing to total liability ratio, we compare very favorably to regional bank peers. On Slide 17, we focus on a key driver of shareholder value, tangible book value per share growth. We have doubled our tangible book value per share over the last 5 years, growing at a compound annual growth rate exceeding 15%. This compares to less than 4% for our regional bank peers. Our tangible book value per share grew by more than 20% compared to Q1 2023. We also recovered $4.3 million or $0.14 per share of AOCI and with over $4 still to be recovered over time. Moving to Slide 18. Similar to the transformation of our deposit franchise, we have transformed our capital position, which has grown significantly for 4 consecutive quarters. We have grown our CET1 ratio by over 280 basis points over that period. Our TCE/TA ratio grew by 25 basis points during the quarter, has increased by 140 basis points over the last year. We remain on track to achieve our approximately 7.5% target this year. While we expect continued accretion to our TCE ratio over the next several quarters, we do anticipate deploying some risk-based capital to support our clients as we generate franchise enhancing and higher-yielding loan growth. When adjusting our CET1 ratio for the impact of AOCI, our capital position was again in the top quartile among banks with $10 billion to $100 billion in assets, and we remain committed to operating the bank with robust levels of capital. On Slide 19, as Jay and Sam highlighted, NPAs as a percentage of total assets ended the quarter at just 17 basis points and remain extremely low. Commercial NCOs were down 3 basis points to just 14 basis points. On a blended basis, our NCOs were 55 basis points, up 4 basis points from the prior period. I would also highlight that the amount of criticized and classified loans declined by 11% during the quarter. Office commercial real estate, an area of perceived higher risk, accounts for only 1% of our loan portfolio. We also continue to closely monitor our multifamily portfolio and remain confident in our underwriting and the unique attributes of our portfolio. As an example, in the majority New York City rent regulated component, we have less than $55 million of loans that rate reset or mature in '24 and '25. Consistent with our strategy to reduce exposure to consumer installment HFI loans, this portfolio now only accounts for about 6% of total loans, down from 7% last quarter. I'll now pass the call back over to Sam before we open up the line for Q&A.

Thanks, Phil. We remain committed to and are pleased to reaffirm our loan, deposit and capital guidance. We are reiterating our NIM guidance and expect margin to expand over the course of the year, getting to the high end of our range by year-end. As stated previously, we do expect that our efficiency ratio will be slightly elevated in the near term as the upfront investments we have made in the teams is realized through increased profitability over a couple of quarters. On our profitability metric guidance, we remain committed to targeting these levels now on a run rate basis by the end of the year as the upfront investment will impact the full year metrics. Concluding on Slide 21, I want to wrap up with a couple of comments. If the enthusiasm during this call was not obvious, let me say we are extremely excited about the amazing opportunities ahead for both our existing franchise and for the new banking teams. Our existing franchise has built a very strong loan and deposit pipeline, which we expect to be realized starting this quarter. And on the new teams, we've admired them from the outside, and for many years, as friendly competitors with deep industry knowledge and exceptional client relationships. And now we couldn't be more grateful to have them join Customers Bank. We're incredibly excited about what they will deliver in the quarters and years to come. We have more or less completed Phase 1 of the deposit transformation that we laid the ground work for several years ago. Phase 1 increased our noninterest-bearing deposits by almost 2.5x and brought our wholesale CDs down to just 10% of deposits in the last 12 months. Phase 2 of our deposit transformation should be even more transformational for our franchise by improving the cost, quality, granularity and primacy of our C&I business unit deposits. We have a robust deposit pipeline that we expect to convert this year and remix our higher cost deposits. This will be a key contributor to improving our net interest margin over the remainder of '24 and beyond. Capital, liquidity and risk management continue to be the focus of our management team and Board of Directors. We are confident in our ability to perform above the industry in all macroeconomic and credit and interest rate environments. With our differentiated business model, client-centric culture and even more talent among our banking and management teams, we believe we are best positioned for success in the years to come as we continue to build out an enviable full-service commercial bank. With that, I'd like to open the call to any questions you may have.

[Operator Instructions] Your first question comes from the line of Casey Haire of Jefferies.

I wanted to start off on the NII guide and NIM guide, maybe on the loan side first. So the loan growth guide that you guys are talking about, it looks like to be about $1.5 billion to $2 billion over the next 3 quarters. Just wondering what your NIM guide assumes for how that comes across? Is it fairly ratable and at what yield?

Casey, so yes, that's correct on the aggregate amount. We did provide some guidance as well on the pipeline that -- look into on the pipeline that we see executing into Q2. And so I think it would be fairly fair to assume that it comes over on a relatively even basis over the period. As far as the yield on the loans, again, as we've said, the pipeline is predominantly driven by our corporate and specialized lending verticals and we've always communicated that we try and target about 300 basis point spread on those products.

Okay. Very good. All right. And then just switching to the funding side of things, I guess, similar amount, right, $1.5 billion to $2 billion, is that coming across ratably? And then I know it's early days and you guys -- Slide 12 is helpful in terms of what the remix opportunity is. But what does the NIM guide presume? Where you guys fall in that spectrum, be it lower 150 bps, 200 bps, 250 bps?

Sure. Absolutely, Casey. Happy to take that question. So in terms of the pipeline, it's difficult to -- loan pipeline -- it's very easy to give clarity on sort of term sheet signed and memos out in closings. Deposit pipeline is a little bit broader. So we're trying to give some sort of a rough outline here of the deposit pipeline, which grew despite the $1.2 billion of production in the first quarter. So I think that, obviously, the new teams are going to be generating a good component of the future pipeline execution, have really been on onboarding through the month of April. These things take a little bit of time. We, in fact, even had 9 or 10 folks start just this week to kind of put things in perspective. Primary accounts require DDAs, require a little bit of time of migrating accounts, setting up payroll, payables, et cetera, those types of things. So we'll see -- I would stick to the 2 to 3 quarters of guidance that we provided on the pipeline to kind of help put that and ring-fence it. We'll give you a better update on sort of how things are progressing in July when we have our next call, which will also give clarity on what happened in the quarter, what percentage came from sort of existing teams and new teams and also give you a little bit of a look forward in the second half of the year.

Okay. Very good. And just last question for me. The PPNR guide -- talking about 10% to 15% from the $367 million baseline. So that's what a little over $400 million to $425 million. That implies a run rate of a little over $100 million by the fourth quarter. Is that what you're trying to put out?

Yes, that's right, getting basically to that run rate in the fourth quarter.

Your next question comes from the line of Stephen Moss of Raymond James.

Maybe just following up here. Sam, just following up here on the efficiency ratio and then just moving drivers, as we think about expenses here, I heard you on the total expenses coming from the new teams down, but just the case of the efficiency ratio kind of seems like low to mid-50s for this quarter, moderating to maybe the high 40s by the time we get to the fourth quarter seems -- or high 40s to 50% seems about right?

Yes, that's right. I think we said 50% by the fourth quarter, absolutely, that's correct.

Okay. And then -- on the teams you hired here, I realize they're deposit-rich, but just curious, how much of a lending opportunity do you have with their client base as well?

Sure. Great question, Steve. So as you can imagine, these teams, as we mentioned, are predominantly deposit focus. However, there are management lines and then C&I extensions of credit that would be needed in some cases to move over primary relationships. That's why we sort of held back and preserve some liquidity in the first quarter. So the typical sort of teams in aggregate are about 4 to 6x deposits to loans.

Okay. Great. Appreciate that. And then -- then in terms of [indiscernible] -- Phil, I hear you in terms of the C&I and specialty businesses. Maybe just could you give us a little color underneath of what are the big drivers of the pickup in the pipeline?

Sure. Yes, Steve. I'd say, very similar to what we've been talking about for some time. We definitely see great opportunities in our fund finance verticals. We're also seeing opportunities in healthcare, in equipment finance, and so it's fairly broad-based across those portfolios, but really pretty consistent with the key verticals that we've been talking about for some time.

And I would just add, Steve, that I think to close the loop on the loan pipelines, I think that we continue to see opportunities. The pipeline today has little from the new teams, and it's still well over $500 million. Phil talked a little bit about sort of the range of where we see this pipeline coming in from. And one of the things that we'll continue to explore as the year progresses is given our low CRE concentration, there may be opportunities in the second half of '24 there.

Okay. Great. And maybe if I could squeeze one more in here. Just as we think about the opportunity on deposits, I see the remixing you have within your balance sheet as funding comes in. Just curious, how you're thinking about -- I know it's still early days, but how you're think about 2025 balance sheet growth.

Yes, Steve. I think that's -- it's a great question. I think that from the perspective of how we're approaching things today is there's a tremendous amount of deposit remix opportunities. And we'll continue to do that for the course of this year and through early next year. We're generating a tremendous amount of capital, as you can see over the last 12 months with a flat balance sheet. We're committed to our, first and foremost, to hitting our 7.5% TCE target, which, as you can see, we'll likely hit in the next quarter or so. And having said that, our loan book is sitting at approximately $13 billion, plus or minus. And there's still growth on the loan side that we can do within the same side of the balance sheet. And only after our balance sheet on the deposit side is completely remixed, would we consider increasing from these levels, which I do not anticipate for the next several quarters.

Your next question comes from the line of Kelly Motta of KBW.

I was hoping we could continue on with the deposit remix opportunity here. I think you have done a tremendous job with the wholesale CDs. Just wondering, can you walk through where you still see opportunities to take down higher cost funding, either by business line or whatnot and the cost of that, just so we can help better frame the opportunity here?

Yes. Sure, absolutely. So first and foremost, there still remains wholesale -- some wholesale CDs above 5%. I think for -- as an example, we have about $500 million plus or minus in the next 90 days or so. Additionally, there are a number of deposit verticals that have on the high end, deposits in the 5% plus or minus type range, especially in sort of financial institutions group and some of our digital bank deposits, more focused on digital savings. And those would be the initial pockets that we would look to. So focusing on higher cost, excess and in some cases, larger relationships to reduce concentration and improve granularity.

Okay. Thank you for that color Sam. And as we look ahead, I appreciate the color of TCE above target and your CET1 as AOCI is top tier. But it does seem like there's a really nice deposit generation opportunity from these teams, understanding that balance sheet growth is limited near term. As we look ahead to next year and beyond, would you anticipate the internal capital generation to be enough to sustain whatever growth those teams would contribute to the bottom line with deposits and loans?

Yes, absolutely, Kelly. So the simple answer is, our internal capital generation, yes, we'll cover future growth. So as an example, if we remixed a couple of deposits -- a couple of billion of deposits this year, and there's an opportunity to continue to produce a few billion more of deposits, while our internal estimates and consensus estimates show that there's enough capital being generated by bank to sustain that level of growth.

Your next question comes from the line of Peter Winter of D.A. Davidson.

Just sticking with the deposits. You guys have done a lot of work on remixing deposits. And I understand that there's still a lot to do. I'm just surprised that the sequential increase in deposit costs has stayed the same the past 3 quarters, same for liability costs. And so the question is, why hasn't it moderated? And would you expect deposit cost to actually come down this year even without rate cuts?

Peter, so the answer to your last question is yes, we would expect deposit costs to trend down over the course of this year. The answer to your first question is, is that our interest expense has been declining over the past couple of quarters, including this last quarter. We did have a mix shift in a geography with noninterest expense from service deposits moving up to interest expense in the quarter through the terminated relationship with our partner that happened in December of last year. So that's really what the difference was from a deposit cost perspective. Interest expense went down, which is a key metric.

Okay. And then just with the 10 new teams coming on, focused on deposit generation, I was, I guess, surprised that you didn't change your deposit outlook for the year.

Sure. Peter, I think that we did increase the deposit pipeline, we also did talk about how the deposit pipeline would be expected to be continuously replenished, which is an impressive number to have in a rolling 2- to 3-quarter basis. And as I mentioned, the only -- the question is all really on timing. It does take time to move over operating DDA accounts and relationships. So like I said before, we'll provide a little bit more color on how Q2 progressed on our next call. And we will be able to give a lot more color with some clarity on how the pipeline is trending, and we hope to continue on this $1 billion-plus type quarterly generation.

Got it. And just my last question. Can you provide more details with regards to the 2 nonrecurring charges on the deposit servicing fees and these FDIC premiums prior to '24?

Sure. Peter, -- so on the 2 items, the first on the FDIC insurance premiums. This was due to the reclassification of certain loans under FDIC categorizations, but it's important to note that the additional expense was just for the purpose of setting the FDIC premium levels. No impact on our risk ratings, classified asset levels or any other credit metrics of the loans. And we went through a comprehensive review and are confident this has been fully addressed. And on the deposit servicing fees from prior periods, we received some additional information from the servicing partner during the quarter. After completing our analysis, we recorded the expense in Q1 and again, believe it's been fully addressed and won't recur going forward.

Your next question comes from the line of Frank Schiraldi of Piper Sandler.

Just on the efficiency ratio, you talked about, obviously, the investment in the teams and the 50% at the end of the year. Just curious, your thoughts about how quickly you get back to that mid-40s, -- is that kind of the right level for CUBI to be operating at, at the intermediate longer term?

The answer is yes. So I think that our target hasn't changed. This is a short-term blip. Like I said before, it's a little difficult to fully project timing, but we expect to get to 50% by the end of the year and then march down from there and go back to sort of our mid-40s target for next year.

Okay. And on capital in terms of the CET1, I guess, target, which you're ahead of. Just curious if that 11.5% is a reasonable place to sort of land in, call it, in 2025. Is that also kind of holding more maybe for a potentially uncertain environment? Or is that a decent place to anticipate you guys get to -- get down to by 2025.

Frank. So yes, I think that both for this year and next year, we think it's prudent at this point in time, with the information that we have today, to operate with higher CET1 levels. And I think the industry has showed a tremendous amount of discipline along the same line. So with the information we have today, that feels like a very reasonable assumption.

Great. And then just lastly on the deposit strategy. kind of entering Phase 2 here, as you noted. I just wanted to make sure I understood some of the commentary around increasing granularity. Is that -- has that been more of a focus maybe in the near term than bringing down overall cost of deposits? And can you also talk about maybe some of the concentrations and places that you are reducing concentrations, obviously, outside of just the reduction in wholesale, places you're reducing concentrations in coming quarters on the deposit side?

Yes, sure. So to be clear, over the last 12 months, we have tremendously improved the granularity of our deposit franchise because the core deposit franchise, excluding the wholesale CDs, has been -- we've added thousands of customers, commercial customers, I think we've laid that out pretty well over the past couple of quarters. We had over 800 commercial customers again added to the franchise this quarter, which is a significant increase off of our existing base. On a go-forward basis, as I mentioned, these teams that we've onboarded, have thousands of customers collectively which, if onboarded over a 1-, 2-, 3-year period, could be in a position to double the size of our commercial customer deposit base, which I think is very important. So granular operating DDA accounts that we are looking to bring in that will create a tremendous amount of franchise value over time.

I guess just on the commercial side, in terms of commercial deposits, are there any areas that you're looking to or expect to reduce concentrations, specific verticals that you can speak to -- or is that -- at this point, that's just not a focus.

Yes. Sorry -- I missed that part of the question. Yes. So I think I mentioned financial institutions. That's an area where we sometimes have some of the larger customers with $25 million-plus type deposit relationships. They're generally higher cost. And I also mentioned, while this is not granular, the higher cost sort of digital bank deposits as well.

[Operator Instructions] Your next question comes from the line of Harold Goetsch, B. Riley Securities.

I got a question on -- I hope you don't talk about too much is the consumer part of your loan portfolio. It has come down nicely by design. And from my experience in consumer loans right now, there's been -- the originators in many of these types of installment loans have tightened many, many times and the returns and risk are improving. What would it take to get back into that if you wanted to, it seems to me it could be fairly easy entry if you wanted it, but I wanted to get your thoughts on that if that is something you want to get back into in a bigger way? Or is it something you want to deemphasize more, primarily going forward?

So I think you are right. There's certainly stronger risk-adjusted return profile on that product now than there has been in the recent past. But I think we've strategically said while -- we want to emphasize our strengths in that business, and it's why we've transitioned more towards our held-for-sale strategies where we can similarly play an important role in that product, but without taking the credit risk of holding those loans on our balance sheet. And so that's where we continue to see that going forward.

And I would just add now that one of the things to build off of the comment Phil made about sort of the strength of our institution versus others is while many of these NPLs have improved their underwriting and arguably the risk profile, that's an indirect business, and we're focused on a direct business and from a direct perspective, our strengths rely on the commercial side and B2B is the way that we approach that business as opposed to B2C or B2B2C, which we had done many years ago. right.

Your next question comes from the line of Bill Dezellem of Tieton Capital Management.

Relative to the 10 teams that you have brought on, what is the size of the loan portfolios that they present. I believe you mentioned in the opening remarks, deposits are about $10 billion. What's the loan level?

Sure, Bill. The expected rough associated loan book is under $1 billion.

Of the $10 billion and of the $1 billion over the course let's say, a couple of years, what [indiscernible] much [indiscernible] what proportion of those would you expect to bring on?

Sure. You cut out a little bit, but I want to clarify one thing as the loan book was over -- sorry, the deposit book was over $10 billion just prior to last March. It was a little smaller at the beginning of this year. But over time, we expect that we'd have an opportunity to bring in the entire current size of the deposit portfolio over the next, call it, 3 years. On the loan side, it sort of stick -- a rough estimate is that sort of 20% to 30% loan-to-deposit ratio for these portfolios.

Great. And then last question, with the recent ruling, noncompete agreements are no longer allowed. Does that make it easier for these teams to bring...

Bill, you cut out again at the end, but I heard the comment about the new ruling on noncompete. I think what's important about Customers Bank and retaining talent is, really do we have the right platform, the right culture, the right business model, the right compensation model to be able to retain and attract top talent? That we definitely have. And from a customer perspective, customers follow the teams and then they look to the banks in terms of the same attributes that I just mentioned. And the good news is that we have and will continue to have both.

That concludes our Q&A session. I will now turn the conference back over to Customers Bancorp President, Sam Sidhu, for closing remarks.

Thank you. I want to conclude by personally thanking our people experience team, our technology, our operations, our product and our treasury management teams for having so many team members up and running in our platform so expeditiously over the past couple of weeks. Thank you to all our analysts and investors for your continued interest in and support of Customers Bancorp, and we look forward to speaking to you next quarter.