CUBI
#Yes.
Thank you very much, <UNK>.
Good morning ---+ good afternoon, ladies and gentlemen, thank you so much for taking the time to be on this call.
The way we'll organize this call is that I'll go over some of the highlights ---+ financial highlights and then <UNK> Walhman, our CFO will go over some details about our financial performance and then I'll come back and discuss with you our unique business model and the performance over the last couple of years, as well as our view on each of the lines of businesses that we are involved in, both talking about the expectations and challenges of each of those.
So talking about our performance, we are really pleased to report another record quarter with you.
First quarter, as you know ---+ first quarter 2017 net income to common shareholders was $22 million, that's up about 31% over first quarter 2016.
Our diluted earnings per share were $0.67, that's up 15.5% over first quarter 2016.
Our first quarter net income to common shareholders from continuing operations as you know, BankMobile is not ---+ is a discontinued operation, so if you take that out, our net income to common shareholders was $23.3 million and that's up about 29% over last year.
And our return on average assets for first quarter 2017 was 1.09% and our return on average common equity was 13.8%, we are pleased that, that puts us among the top quartile of banks in the United States.
And the pre-tax pre-provision return on assets and return and average common equity for the first quarter was 1.51% and 20% respectively.
Our book value per common share was $21.62 at March 31, and that's up 12.5% over March 31, 2016.
From a capital point of view, we've been very focused on it as we get ready to cross the $10 billion mark.
So, I'm pleased to share with you that our capital ratios were 13% estimated total risk-based capital, 9% Tier 1 leverage and 6.7% tangible common equity to average tangible assets.
From an overall business point of view, total loans were up little over 5% to $8.5 billion or $8.3 billion at March 31, 2017.
And total deposits were up about 8% to $6.6 billion over last year.
And our first quarter efficiency ratio from the continuing operations was 43.3% and that's a pretty significant improvement of about 7 percentage points over the same period last year.
And so with that, I'd like to hand it over to <UNK> to go over some details of the financials.
Okay, thank you very much, <UNK>, and good afternoon everyone.
As noted by <UNK> and as described in our first quarter 2017 earnings release Customers is reporting gross assets of $9.9 billion, which is up $900 million from March 31, 2016, and up $500 million since December 31, 2016, so a quarter ago.
Q1, 2017 earnings per common share was $0.67 per share, which compares to Q1, 2016 earnings per common share of $0.58, and Q4, 2016 earnings per common share of $0.51.
So, all earnings metrics for Customers are very positive for Q1, 2017.
I'm going to take just a moment to put a few of the key ratios in the context that <UNK> has referred to these.
I'm going to put in a little bit different context.
Customers set out three years ago ---+ our customer set targets three years or more ago that they wanted to hit from some of these earnings metrics and that is a return on average assets of 1.0% was that, our return on average common equity of 12.0% was established and a target for efficiency ratio in the low 40s, was that many of you who have been following us through the years, perhaps remember though.
I just want to compare those to where we are now just three years later, when we do our reporting our return on average assets of 1.09%, return on common equity of 13.8%, an efficiency ratio in the low 40s.
So we have exceeded those targets and we are of course setting new targets that we're going to work very hard for our shareholders to achieve.
Our second set of key ratios that many investors have talked to myself and talked to <UNK> about, as we've met with them over the past couple of years were our regulatory capital ratios ---+ capital ratios in general.
There were some concern out there from the investor community that the capital ratios were too low and therefore, they were ---+ what was priced into the stock was there would be a dilutive capital raise.
During ---+ I want to emphasize a couple of things here, during 2016 Customers increased its capital by over 50% to over $300 million, while diluting common shares only around 10%.
This was accomplished by retaining our earnings, our common stock raise and preferred stock raises, but we set our capital ratios at levels significantly in excess to the well-capitalized levels, which include total risk-based capital at 13%, Tier 1 risk-based capital at 11% and CET1 ratio at 9.5% and leverage ratio at 9%.
And as <UNK> just noted a minute ago, we have reach those targets for all of our capital ratios with the exception of CET1 when we used some preferred stock instead of common stock in our capital stock, a little bit different, but it still provides that capital needed.
So we are hitting the capital ratios and these are very strong ratios and very close to the midpoint of our peer banks and industry peer groups.
So, I just want to emphasize that as it relates capital.
So the third key item here is, we do watch our asset quality very carefully and are very proud of maintaining the strong asset quality that we have in Customers.
In Q1, 2017, NPLs were only 33 basis points while up a bit for some isolated credit issues on individual loans, it is in fact much lower than our peer group and much lower than the industry non-performing loans taken as a whole.
We have not compromised our underwriting standards and we're committed to not compromising our underwriting standards as we go forward and look for a strong asset quality.
So, these actions taken as well as many of the other actions taken, currently has positioned Customers for a good strong run of sustainable earnings.
Let me walk you through the significant events as captured in the income statement and discuss the other drivers of the performance.
Net interest income from Q1, 2017 was $62.4 million compared to $57.6 million in Q1 2016, and $64 million in Q1, 2016 ---+ Q4, 2016.
Average loan balances were higher in Q1 2017 compared to Q1, 2016, up $1.6 billion and that drives most of the increase in those numbers and they could have been higher, except we have worked very hard in Q4, 2014 and forward to keep our assets under $10 billion.
So the loan volume is good and that has driven the rate increases, I mean, the net interest income increases.
Regarding interest rates, Customers reported a net interest margin of 2.73% in Q1, 2017 compared to 2.88% in Q1, 2016 and 2.84% in Q4, 2016.
The net interest margin declined during Q1, 2017 compared to Q4, 2016 is really attributable to two key matters.
The decline in the outstanding balances and the warehouse portfolio down in Q1 average balances approximately $655 million from Q4 and down to $250 million from 2016.
And as we have talked about in the past that is a business that is very much seasonal with lower volumes during the winter months as residential mortgage loan originations are lower.
And customer funds, a significant portion of that portfolio using low cost overnight funds, because of their short-term duration of the asset and so ---+ and that provides us a very strong net interest margin.
And then there is ---+ the second element is the dilutive effect of smaller margins on the investment portfolio and cash in the Federal Reserve balances, which were up about a combined $550 million.
So, you had a decrease in higher margin assets and an increase in some lower margin assets.
So as a result of these shifts in the use of funds, Customers interest income declined by approximately $3.6 million compared to Q4, 2016, which reduced the yield on these earning assets by approximately 15 basis points.
However, as we look forward in Q2 and Q3, we do expect the mortgage warehouse loan balances to recover following the seasonal reduction in the volume that we experienced in Q1.
And assuming we sell or manage the purchase investment securities portfolio to fund that growth, we should see the NIM increase back to more traditional levels in Q2, 2017.
Non-interest income from continuing operations for Q1, 2017 was $5.4 million and excluding the impairment on the Religare security, noninterest income was $7.1 million.
This is a good number and it's up from non-interest income for Q1, 2016 of $5.3 million, a $1.8 million increase.
The increase in non-interest income results from greater sale, gains on sales of loans in the SBA business compared to the past, a year ago as we grew that business over the past year.
And then in the first quarter of 2017, Customers did sell approximately $100 million of multi-family loans in this period for a $0.5 million gain.
And then there is this swap premiums on ---+ that are market derivatives that are included in this item for about $1.5 million.
As has been described in our securities filings on several occasions, Customers operating expenses have been increasing in general as Customers Bank grew due to the the additional resources needed of all types to run the larger banking business, so we needed more employees, we needed more space to occupy, we needed more technology, professional services impact, because the bank was bigger and became more complex.
However, in Q1, 2017, what we saw is that as asset growth is moderated and as we worked to stay under $10 billion for now, operating expenses actually decreased to $30.1 million from continuing operations.
Now, that's a decrease of $1.7 million from Q1 2016 and a decrease of $400,000 from Q4, 2016.
So it seems that we have had some consistent decreases in our core banking costs over the course of the last year.
Correspondingly, our efficiency ratio from continuing operations has declined to 43%.
There are increases and decreases embedded in the different expense line, but the overall trend is for our operating expenses from continuing operations to ---+ that growth to moderate as the level of asset growth is moderated.
And expense control has been an area of management focus as the bank has grown and particularly during the first quarter.
Regarding income taxes, Customers estimated income tax rate that we use for Federal, state and local is 38%.
However, in Q1 2017, Customer recorded tax benefits related to the vesting of restricted shares and exercise of options of $2.5 million and that following the GAAP accounting rules and we talked about that extensively last quarter when we adopted ASU 2016-9.
And then Customers also recorded a $3.5 million deferred tax asset at this period, which offsets ---+ which relates to the $9 million of impairment charges recognized by Customers related to our equity investment in Religare Enterprises.
You may recall that in the fourth quarter, we recorded a $7.3 million impairment charge and we did not take any tax benefit at that point in time, because of the rules allowing ---+ that would allow us to do so, which would needed to have an executable tax strategy that was prudent and reasonable.
During Q1, 2017, Customers developed those tax strategies and obtained clarity around our ability to execute those strategies that allowed Customers to realize the tax benefit on the full set of impairment losses.
A $0.7 million of the tax benefit relates to the Q1 2017 impairment recognition and then $2.8 million of this related to the impairment recognized in Q4, but that we could not recognize and so we had a prudent strategy in place.
Just turning for a moment, personally to the BankMobile business segment, in Q1 2017, the BankMobile business segment, which is reported as a discontinued operations and our consolidated income statement reported a net loss after taxes of $1.2 million compared to a net loss of $1.1 million in Q1, 2016 and a net loss of $3.5 million in Q4, 2016.
The Q1, 2016 results did not include the student loan proceeds and so I don't think is a reasonable comparison, but the Q4 numbers both ---+ and the Q1 numbers both include the operating results of the disbursement business.
The improvement in the GAAP operating results in Q1, 2017 compared to fourth quarter of last year is due to [receipt] of the students of their monies, on their refunds in January and then having that spend for three months, whereas in the third quarter the monies were received in August and September and we did not have highest spend in those three months and of course, this business is driven by the interchange income that's received on that spend.
It's important to note here that, one, we are growing that business, and it is a scale business.
But secondly, that the GAAP results that I just talked about in this paragraph are not reflective of what the business earnings or that's the business would earn if it was a standalone entity or even with the business earnings would be in management's internal reporting.
The GAAP earnings does not give the business segment any credit for generating over $700 million in deposits, which are then used to fund balances ---+ loan balances across the bank.
We do provide segment reporting, it is in the earnings release and it is in the investor presentation.
And on the segment reporting basis, Customers calculate that the business contributed $1.5 million to Customers after-tax net income for the period and that's assuming a funds transfer pricing equal to about 1.95% on those deposit balances.
And the BankMobile was an independent company, the business could directly invest in debt securities or loans that would have even a higher yield than the 1.95% that we allocate to them.
So in summary, <UNK>, I believe that Customer has a very strong start to 2017, a very positive start and barring any unforeseen surprises, we will enjoy record earnings for 2017.
Back to you.
Thank you, <UNK>.
We view this period as a very ---+ sort of like a milestone because as you've seen and you heard from <UNK> that Customers Bancorp's total assets were $9.9 billion at March 31.
So, you should expect us to cross the $10 billion mark, whether it happens at second quarter or third quarter, but it's going to happen.
So, we see a tremendous amount of growth in our pipelines and Customers is well-positioned to do that.
So, as part of that strategy, we are very well-prepared and have been involved for the last 12 months to 15 months in preparing for the $10 billion category.
And we are ---+ we believe that all the GAAP analysis and the strategies that we've developed show us that we are very well prepared for that and so, we believe that we will not be a DFAST compliant company until 2019.
However, we believe that there is a pretty good chance that we might be doing a dry sort of a run for DFAST, either at the end of this year or in the middle of next year.
So that by 2019, it's a very smooth movement from being below $10 billion bank to above $10 billion bank.
As many of you may know, it was about seven years ago that Customers Bancorp was formed and we started off as an extremely troubled $250 million asset company.
And now here we have reached the milestone of the $10 billion asset company and we've done it principally all from ---+ as a result of organic growth.
So what is our ---+ what has been our strategy.
So we've been a very highly focused, innovative, relationship banking based commercial bank, a business bank, that's been focused on strong organic growth, focused on effectively utilizing our capital, focused on good resource allocation and the branch lite model and operating in attractive markets.
As you know, our markets had been Boston to Philadelphia along Interstate 95 and we've done this also with a very robust risk management driven business strategy.
What's been our model and consistently for the last seven years since we were a troubled $250 billion bank that we ---+ some of us personally invested in to take it to $1 billion plus market cap company today.
The number one has been what we call unique single point of contact model.
What that is, it's high tech, high touch model with a very, very few banks branches, dominance in few product lines, I'll talk about it; and supplemented with very experienced leadership teams throughout the market franchise and having a style that is extremely innovative and to some would call it disruptive to the traditional banking style; while through our robust risk management infrastructure having a strong asset quality and a strong focus on other types of risks and then hence resulting in creating a high growth company with superior performance.
What have we created in the last seven years besides higher assets.
This is ---+ we created a company, where the total revenues just five years ago were $50 million and today they are ---+ last year there were $272 million and the growth that we experienced, we took pause buttoned on that, since June 30, last year.
And we feel that we are positioned to take our foot off the pause button because it was prudent for us to build our infrastructure, get ready for the $10 billion, get our capital in place, get our systems and processes in place.
And so, we expect, you should expect us to continue with our growth strategy.
And these revenues have grown at a compounded annual growth rate of 38% over the last five years.
And that came in as a result of our organic growth and we expect to see ---+ you should expect to see the similar in growth in terms of dollars of business coming into us.
Our net income over the last five years, we were making only $2 million in 2011, that's all we made.
And our net income as you know was over $85 million last year and it was $21.5 million just from the ---+ when you take out all sorts of unusual items this quarter.
Our net interest income has grown over the same period time, which is five years from $39 million in 2011 to $250 million in 2016.
And at the same time, while that ---+ while our net interest income grew from, like I mentioned to you from $39 million to $250 million our expenses grew only from $37 million to $130 million.
That is the reason why our efficiency ratio, which was about 90% five years ago is today down to 43%.
From a deposit growth point of view, as you know the numbers for this year, our total deposits five years ago were only $1.5 billion.
Our DDAs five years ago were only $150 million.
Our cost of deposits five years ago was 1.2%.
Our average deposits per branch five years ago were $100 million compared to about $400 million today.
So that's what we mean by a branch like model.
This single point of contact model has been very effective for us in executing our strategy.
Today, our banking, the privately held businesses, those commercial loans make up 37% of our portfolio.
Banking is a high network families, that's our result of product dominance, which are some of you call them multi-family loans, they will make up 40% of our portfolio.
Commercial real estate, which is the main driver for most community banks in United States only makes up 16% of our portfolio.
So our total loan growth has been 38% over this five-year period.
Some may regard, this is 38% CAGR over this five-year period.
Some may regard this to be significantly above average growth, hence you may say that many times it comes with problems.
So, let me share with you the non-performing asset trends, which I'm sure many of you are aware of.
Today, our non-performing loans are 0.33%, five years ago they were 0.72%, so there is a consistency of performance with continued gradual improvement.
Now talking about our different lines of businesses.
C&I lending is our most important line of business and we've broken that down into privately held businesses in our own geographic market and privately held mortgage companies throughout the nation.
So our businesses are for the private banking business, we are between Boston and Philadelphia and for banking for the mortgage companies, we are all over the country.
We are targeting $100 million in annual revenues and less single point-of-contact businesses and we supplement that with the SBA business, which is also regional in nature to serve these small, medium-sized businesses.
From banking the high net worth families, that is only a regional business for us with about 60% of the business coming from New York City.
And that to us is an approach that we've taken very, very prudent approach over here and we believe that we have a very strong credit quality in this niche and that is run by people with over 30 years of average experience in this line of business.
From a ---+ one can say from the start, we've had a strategy of running a company with strong credit quality and making up a lower margin through much better efficiencies.
So our total cost as a percentage of assets five years ago were 2.5%, today we are 1.2%.
So that is the difference where the average bank is still spending between 2.5% to 2.9% to run their companies by spending only 1.27%, which is our number at March 31, to run the Company.
We can produce the same kind of results that you would expect from companies with 3.5% margin to produce with only a 2.8% to 2.85% margin.
And that is in our opinion a much more sustainable model.
As a result of all this, our book value over the last five years has gone up by 12% compounded and Company shareholders over the last five years have seen their equity go up by 213% compared to less than 95% ---+ 97%, excuse me for the KBW regional index.
So, let me share with you where do we sit today and how do we plan to cross the $10 billion mark.
We are going to remain focused on the lines of business that has taken our Company from $250 million problem bank to $10 billion high performing bank and that is not going to change.
Our business strategy is clear, it's working.
We will not deviate from our critical success factors of superior credit quality, focusing on recruitment and retention of high-performing team and staying with our business strategy.
So we believe that the model that's working for us in Boston, in Providence, in New York, in Philadelphia can be repeated in other market areas.
So, over the next couple of years, what you should expect us to do is to look at markets like, neighboring markets like Washington DC, market like Chicago and the like ---+ and not be surprised, if we enter those markets as a business bank with private banking type of teams.
Our focus will remain the same, which is superior credit quality and the niches will be the same which are small, medium-sized businesses below the $100 million in revenue.
And our revenues will be made up of just net interest income coming out of low cost deposits as well as consistency of performance and manage our risks at the same time.
So C&I business, you should expect that to continue to grow for us at a clip of somewhere between $250 million to $450 million to $500 million a year, as we cross the business and those are the targets we set for ourselves.
Regarding multi-family over the last couple of years, we have been looking at consistently ---+ almost consistently selling a portion of our production.
We did it again last quarter by creating liquidity and originating a lot of the business.
So we will continue to do it that way.
But multi-family loans will be a significant part of our business, but we don't believe it's going to be significantly in excess of 40% of our balance sheet.
And as far as commercial real estate is concerned, that is not a very significant, but that we defined as non-owner occupied commercial real estate.
We think that is the highest risk business and we will continue to focus because of the volatility of that business, we'll continue to focus on very selective niches in that area.
Banking the mortgage companies, even though it's extremely volatile business, but we are balancing it like you saw in the first quarter by either looking at investing some of those assets in multi-family businesses or investment securities or be willing to take a hit to our margin ---+ temporary hit to our margin and making it up to operating efficiencies.
Since our strategy for the last three quarters has been just remained below $10 billion, we've been very focused on improving our operating efficiencies and that's why you saw a flat expense.
Thus by design, you should expect our expenses to go up, because we need to invest in the infrastructure as we continue to build our company, but the efficiency ratios should continue to improve.
We won't be satisfied till we get to the high 30's in terms of the efficiency ratio.
So with that I'd like to now ask Tom to open it up for questions if any.
<UNK>, what we ---+ one thing that we did that increased the ---+ let me put it this way, when the balances come down on the Federal Home Loan Bank borrowings, we're paying off the short duration assets and so that leads ---+ on the short duration liabilities, which leads to longer duration liabilities in place.
And so as we bring down the ---+ as the balance come down and we pay down the shorter duration, the average cost goes up.
In addition to that one, we borrowed ---+ we did the investment securities, we borrowed those monies with ---+ borrowed the monies to fund those with a debt longer duration than we would normally do, close to two years and so that also provided some additional cost of borrowing.
So, it's a function of not so much what we did with that, in terms of the [layering] on higher cost borrowings, so much as it is, we paid off a lot of the short-term borrowings, but then raised the average cost.
<UNK>, the 38% is the basis where to start from, but then you are going to have the effects of the accounting standard that became effective since the beginning of this year, we early adopted in the fourth quarter of last year and that's going to consistently have an effect on the effective tax rate going forward.
And should leave you of what I believe is part of the core operations, I think there is some discussion on that last quarter with analysts and amongst them.
<UNK>, yes, we are constantly looking at recruiting teams and both within our existing market and for the longer haul outside of existing markets in those geographic markets that I just shared with you, which is Washington DC and Chicago.
And we are positioned that within the next six months or so that we will bring them onboard.
I think, <UNK>, it's ---+ everything is on target based upon what we had said, we expect the BankMobile divestiture to be completed this year subject to regulatory approval.
So all I can say is that, if there are any more updates we will appropriately put them out on the 8-K.
<UNK>, we have bank branches ---+ the legacy bank branches in the Pennsylvania market or the legacy Philadelphia markets.
So our retail and business banking operations are producing about 20%, 25% of the deposits are right here in this market.
The other 75%, which includes New York principally are coming out of our private banking offices principally New York, we have about $100 million of deposits out of New England.
And so the New York market has been the best market for us to gather deposits.
Our strategy has been to recruit teams not made up of just lenders, but to recruit teams as we call them made up of bankers.
And this will ---+ this would be teams of private bankers who are already managing a portfolio of deposits.
So the $1 billion plus deposits that we've gotten in New York in the last few quarters that came in through teams that we recruited including two teams from Signature Bank.
So that's how we intend to grow.
We will ---+ we are ---+ the teams we are recruiting first will be the liability based team who can get deposits in for us and that will be followed by supplementing them by teams who will generate assets for us.
Our model of profitability and for creating the incentive compensation for our teams is very much based on much higher compensation, if you can self-fund yourself and generate those deposits and the lower cost deposits like DDA's and non-interest bearing or interest bearing are the most common in terms of affecting your profitability of those teams.
And you can have very profitable and extremely high incentive compensation plans, even if you don't generate a single loan.
We have earning asset capabilities, which are all across our region, but the funding capabilities are the most important.
So, it's a funding-driven strategy or a liability-driven strategy that we will be pursuing as we expand our franchise.
So we tend to get deposit ---+ we intend to have deposit gathering branches in each of the markets, so that right now we are operating with LPO's, but we'll be converting many of those LPO's into deposit generating branches.
So that is the strategy that will replace some of our ---+ not all of the deposits that we are divesting through the BankMobile sale.
And through our own franchise, we didn't see a need to do that, but now we will replace some organic growth principally in the DDA area and other low-cost area, and we are highly confident of replacing those deposits that would be lost to the BankMobile divestiture.
<UNK>, have you seen any Customers Bank in New York.
No.
We are one ---+
Like people in Chicago think they are more unique than New York.
So, our strategy is going to be the same.
We are not a retail bank.
We are not going to be doing this typical marketing that you'd expect from retail or traditional banks.
Our marketing will be much more of a signature bank type.
Yes, there will be some contributions or some involvement with the business community and the charitable community in each of those markets.
But no, if you think we will be doing billboards or newspapers or television in these markets, that would be a wrong assumption on your part.
We do a P&L for each of those markets that we are entering and our goal is that within one year we will be making up any of those start-up expenses and they will be profitable.
And then there is a growth rate that is our business model.
So, as we develop that <UNK>, we will be sharing with a little bit more details with you.
Now, you can understand very much that you would want to see that sort of transparency.
But I just wanted to go over the last five years, because five years ago we were asked a question how can you generate loans and deposits in New York.
Just like you're telling me, now New York is different, you guys are known, guess what, we weren't know at all in New York.
We had a reception for our Private Banking clients, we had 135 people show up at 101 Park Avenue and those were the who's who in New York City.
Same thing goes on in Boston and Providence.
It will take us awhile; two to three, four years, but I would expect you to ask a question.
Chicago, it was easy for you, but how is XYZ city would be for you.
Okay.
I'm looking for the page in the Investor deck that there is a page in this Investor deck where we do show, if you want to take a look at that there is 100 basis point increase and 200 basis point increase.
So at March 31, with 100 basis point increase you should expect using our simulation model, you should expect our net interest income to go up by 2.3%.
Last year at the same time that would have gone up by 1.2% and with the ---+ I'm sorry, this is with the 100 basis points.
With the 200 basis points, it will go up by 3% and last year at this time, they would have gone up by 1.4%.
So, we are much more asset sensitive today than where we were at March 31 of 2016.
And this net interest income simulation is based upon our asset liability models, they had ---+ and it assumes flat balance sheet with no volume increases or declines and those strategies other than simply running a simulation model.
And that is the only way that you can compare Apples with Apples.
So even though you are so right, mortgage warehouse business does affect the interest sensitivity, but at the same time we extended our liabilities to dramatically reduce the risks of interest mix sensitivity for us and make us more asset sensitive today during a time period when we expect that the rates might be going down.
And in regards to the [beta's], obviously the beta's that we use depend upon the particular product and we do have some variation within there.
But I think the overall beta that we're using is about 50%.
And obviously, we do have some products where we're doing that or maybe a little bit more, but there are other products where we have moved at this point in time, despite having three interest rate increases.
Yes.
But do remember that our overall objective is to manage ourselves relatively neutral.
We're not looking to position ourselves for interest rate increases or decreases, but to remain relatively neutral because we're not betting on which ---+ we're not betting on which ---+ that's not a business to estimate to guide as to which way the interest rates are moving.
We do try to maintain ourselves relatively neutral and tend to our business of banking.
And I think you should, I'm sure you're aware of this, but about 70% of our C&I loans are immediately ---+ are variable rates.
100% of our banking the mortgage company loans that you referred to them that mortgage warehouses are variable rate.
And you did notice, I'm sure, in spite of the 75 basis points that move over the last couple of quarters.
Yes, you've seen that we have moved our deposits and we are noticing banks simply shrinking and not passing on any of the rate increases that should also give you t he confort level that why our deposits businesses is continuing to grow, because we are managing our company in a neutral basis, we are not dependent on continuing to improve our profitability just by not passing on the higher rate to deposit.
Yeah, sure.
I will take that.
They were basically three loans and two of them are SBA guaranteed loans and one of them was not in that situation, it was all about a business model.
It's very ---+ it's amazing, when your bankers make credit decisions, the last thing we worry about is the impact of technology on your business.
And right now it is the number two item in our assessing whether we should extend credit to a small medium size business, is the impact of the changing technology, consumer trends on that business.
That's the number two banks will be considered.
So that those ---+ all those three credit problem loans, we believe that they have been resolved, but that's not to say others won't come in.
We are in the risk taking business, but our belief is that you should ---+ the kind of business we are running, you should expect us to have about 50 basis points non-performing loans on a sustainable basis.
Our model is organic growth.
So we'll never say never, but we are not focused on M&A.
We are focused on tangible book value growth, not just justifying of five-year payback on tangible book value dilution.
We believe that we are extremely attractively valued at only 11x earnings and 145% of book value, where we are trading right now.
It makes a whole lot of sense for us to continue doing what we've done because that's resulted, even though we are attractively priced that's resulted in way above average returns for our shareholders.
So the model that's worked for us in the past, we believe is the model we should stick with and continue with our organic growth and just be extremely opportunistic if we see an opportunity for an M&A, but M&A is not our primary strategy.
No.
It's in a different industry.
No.
Those credits have been worked out already.
I think we look at the dominance of large banks, those are very attractive markets the ones that you're naming.
But to be able to recruit teams would bring a book of business with them.
It's a whole lot of easier if those teams right now already have $200 million to $400 million portfolio, that either of deposits or of loans that they're already managing and that usually is a whole lot easier to identify in the larger markets.
And then you can recruit those teams and then our incentive compensation plan, it is very attractive because those are the teams who can see, who in the past may have gotten into de novo banking and now de novo banking is not an option.
So, we basically incent them in a way that coming and join us ---+ our family and look at our existing teams, and what are they doing and you are pretty much in a defined area where risk management is very clear that you cannot violate that.
But within that framework, you're basically operating your own bank.
That's why we are focused more on the bigger markets right now, but that's not to say, that later on, we will not focus on the next Tier, but there is so much of business in our opinion that was available in New York and in Boston, and less so in Philadelphia to be honest with you.
Out of all our three markets, Philadelphia is our smallest market.
And we probably see Virginia, DC, Maryland area is a very attractive market and we are already doing enough business in Chicago to really take-off from that, because we've been operating out of our New York operations to serve Chicago and we like that market, and like the idea that there is M&A activity taking place in that market as we can take up change.
At this time, we are only focused on the two markets that I shared with you, but we wouldn't rule out Atlanta.
But we've got to take some baby steps and make sure that things are working well.
We are not perfect in our executions.
Right now, we want to limit it to about two new markets for the next 12 months to 18 months and learning from our mistakes, I'm sure we will make some.
And prompted by that, we'll look at the other markets and I think Atlanta is on our list.
Well, thank you, Tom, and thank you very much, ladies and gentlemen, for joining our call.
If you have any other questions, please give us a call.
Thank you.
