Investors Bancorp, Inc.
Q1 2017 Earnings Call Transcript

Published: 29 Apr 2017

[Operator:]

Good morning and welcome to the ISBC first quarter earnings conference call. All participants will be in listen only mode. [Operator Instructions] Please note this event is being recorded. We will begin this morning's call with the company's standard forward-looking statement disclosure. On this call, representatives of Investors Bancorp Incorporated may make some forward-looking statements with respect to its financial position, results of operations, and business. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors some of which are beyond Investors Bancorp’s control and are difficult to predict which can cause actual results to materially differ from those expressed or forecast in these forward-looking statements. In last night's press release, the company has included its safe harbor disclosure and refers you to that statement. That document is incorporated into this presentation. For a more complete discussion of the certain risks and uncertainties affecting Investors Bancorp, please see the section entitled Risk Factors, Management Discussion and Analysis of financial conditions and results of operations set forth in Investors Bancorp’s filings with the SEC. And now I would like to turn the call over to Kevin Cummings, President and CEO of Investors Bancorp.

[Kevin Cummings:]

Thank you Andrew and good morning and welcome to the 2017 first quarter Investors Bancorp earnings call. The company and bank had a solid quarter with respect to earnings per share and earnings and loan growth. We continue to leverage our balance sheet and diversify our loan mix while maintaining strong credit quality. We finished the quarter with net income of $46 million or $0.16 per share compared to $44.7 million or $0.14 per share in the first quarter of 2016. This represents a 14% increase in EPS and a 3% increase in net income. After a strong finish in 2016, the bank posted strong loan growth in the first quarter with $694 million in growth, which exceeded our expectations. This growth was across all loan categories as our consumer portfolio grew $53 million in the quarter, and commercial loans grew $641 million. Our residential and consumer portfolio posted growth for the first time since 2013 and we look forward to continuing this trend as we manage our CRE exposure and continue our diversification of the loan portfolio. Business lending, which includes owner occupied commercial mortgages, increased 5.4% for the quarter or $112 million. This growth in business lending continues to be a bright spot for the bank as it follows year-over-year growth of almost 28% since the end of the first quarter of last year. We continue to diversify our balance sheet and leverage our capital. As many of you know, we are approaching our three-year anniversary of our second step, and during that time we've had significant change and growth in the bank. Since the first quarter of 2014 we have grown assets by 45% or $7.5 billion. Over the last three years loans have grown $5.9 billion or 44% as we have increased our commercial lending while maintaining strong credit quality. Deposits have grown $4 billion or 35% over this three-year period as we continued to expand our franchise in New York and New Jersey. We have opened 23 branches in the last three years. Core deposits have increased from $7.9 billion to $12.6 billion or 63% and now represent 82% of deposits at March 31, 2017. Although we have scaled back our treasury stock repurchases since the election, we have purchased close to 63 million shares or $746 million at an average price of $11.86 per share, since we received approval of our stock repurchase program in March of 2015. So that's over the last two years we've purchased close to $750 million. In addition, we have increased our cash dividend from $0.04 in June of 2014 to $0.08 today. This has allowed us to leverage our balance sheet -- I mean, leverage our capital, post second step from almost 20% at June 30, 2014 to under 13% at 12.85% at the end of this past quarter at March 31, 2017. All of this expansion in growth has been accomplished without an acquisition. As reported earlier, we mutually agreed to terminate our planned acquisition of The Bank of Princeton transaction in January. With our organic growth to date, we've been able to hit our key growth objectives and earnings goals in our strategic plan post-second step. This has been accomplished by maintaining strong asset quality, continuing to invest in our risk management activities, and expanding our retail franchise. Our risk management teams continue to work hard enhancing our procedures and systems. For the last ten months we've been improving and investing in all areas of risk management, including BSA, credit, technology and operations. Our success in growth in assets and earnings has resulted in a new opportunity for us to improve our risk management for the bank that want to continue to grow. We are focused on the situation and we will get there. The progress has been steady but to be honest we are impatient and will not be satisfied until it is completed to both our heightened expectations and those of our regulators. With respect to asset quality, it remains very strong as net charge-offs had totaled $1.5 million versus $6.9 million in the first quarter of 2016, and net recoveries of $73,000 in the fourth quarter. Our non-accrual loans decreased to $87 million from $94 million, or 45 basis points of total loans. 80% of these non-accruals at quarter end are residential and consumer loans with an average balance of $162,000. We continue to be conservative in our evaluation of these residential credits as we move them through the extended legal process that we face here in New Jersey and New York. In fact, in fifteen of the last seventeen quarters, we have posted gains on sale of ORE properties and have only incurred a cumulative loss of $300,000 in two quarters since 2013. On the commercial side, it's really an unbelievable statistic – non-accrual loans and non-performing loans totaled $10.9 million or 8 basis points of commercial loans. Our provision expense exceeded net charge-offs and allowed us to continue to increase our allowance to $231 million at quarter end, which represents 1.18 of total loans, and 265% of non-accrual loans at March 31, 2017. As mentioned on previous calls, we have one commercial customer relationship that is -- contains a multiple loan relationship with $31 million delinquent 60 days at December 31. Today the total relationship of all its loans is approximately $48 million of which $34 million is less than 30 days delinquent as of April 28, $8 million is in the 30 category and $6 million is current as of today. We will continue to monitor this situation but do not expect a loss as the portfolio is well collateralized with strong tenants. We will also continue to enhance our risk matrices in our analysis of our commercial real estate portfolio. We have invested in both people and analytics to cut and slice the CRE portfolio to improve our risk management in this area as we continue to grow. For example, approximately 51% of our multifamily portfolio is located in the three boroughs of New York

[Sean Burke:]

Thank you, Kevin. I'd like to briefly review some of our financial highlights for the quarter. Despite slower market conditions, typically characteristic of the first quarter, our loan portfolio grew $695 million quarter over quarter to $19.5 billion, representing 15% growth on an annualized basis. Our loan pipeline stood at a robust $2.3 billion at March 31, 2017. Core deposits grew $219 million to $12.6 billion from $12.3 billion quarter over quarter. Asset quality metrics remained strong. Non-accruals to total loans were 45 basis points from March, down from 50 basis points at December. Shifting gears to income statement. Net income for the quarter was $46 million or $0.16 per share, an increase of 14% year over year. Net interest income decreased $1.6 million from the prior quarter to $167 million as loan growth was offset by declining loan prepayment fees and rising deposit and borrowing costs. Net interest margin declined 12 basis points on a linked quarter basis with prepayment fees accounting for two-thirds of the margin decline. Prepayment penalty income totaled $3.2 million for the quarter versus $7.4 million in the fourth quarter of 2016. Provision for loan losses was $4 million for the quarter compared to net charge-offs of $1.5 million. Net interest income totaled $9.7 million which was up $1.2 million from the fourth quarter of 2016. Non-interest expenses totaled $99.6 million, an increase of $10.5 million from the fourth quarter of 2016, the increase due in part to a lower than normal expense run rate in the fourth quarter, headcount and professional fees related to BSA resolution efforts, as well as normal merit increases. Excluding the impact of BSA related professional fees, noninterest expenses totaled $95.1 million in the first quarter of 2017. Our tax rate was 37% for the first quarter. Going forward we expect our tax rate to be in the 37% to 38% area. Now I'd like to turn it back over to Kevin for some concluding remarks.

[Kevin Cummings:]

Thanks Sean. As we wrap up the call, I'd like to mention and welcome Peter Carlin from Blue Harbor as our new board member who replaces Brendan Dugan who passed away in December of last year. Brendan was a good friend and mentor and will be surely missed. He had a great banking career and was a great leader in business, education and in the community. Peter joins us representing our largest shareholder and has been working with us for over three years. We are very happy to have him join our board and I look forward to working with him and our entire board to enhance shareholder value for all our owners. The last three years have been certainly a surprising and wonderful journey. We have created a strong regional bank with almost $24 billion in assets, 152 branches from the suburbs of Philadelphia to the boroughs of New York and Long Island. We are the largest bank headquartered in New Jersey and the future looks bright for the bank. We are an engaged management team that leads by example. I'd like to commend the work of some of the people in our risk management area for their efforts led by Philip Earling [ph], Paul Chavez, Mark Talent [ph] and Josh Myers as they managed to build out on the improvements to our processes in these areas of BSA and credit risk. We continue to be a positive force in our communities by being the regional bank that keeps community in banking. Our foundation continues to support our employees with grants and donations and our employees give so much time -- so much of their time and talent to so many great causes. Dom, Dennis Budinich, our Chief Culture Officer, and I have completed three or four town-hall meetings where we have met with all our employees to discuss our future and our plans for continuous improvement as individuals, teams and the bank as a whole. It certainly hasn't been a predictable journey but we are patient and focused on meeting our long-term objectives. We want to be a different bank, one that makes a difference. This management team strives to lead this organization with a passion and a purpose to be the best it can be. We appreciate your continued support and look forward to a bright future. So now I'd like to open it up to questions and we're ready to go. Thank you very much.

[Operator:]

[Operator Instructions] The first question comes from Mark Fitzgibbon of Sandler O’Neill and Partners.

[Mark Fitzgibbon:]

Hey guys good morning. Sean, I wondered if you could share with us your outlook for expenses for the remainder of this year. Are they likely -- have we seen the biggest chunk of the increase related to BSA? Is that sort of in the numbers now going forward or what are your thoughts?

[Sean Burke:]

Well, expenses were elevated as a result of our BSA resolution efforts and expect they will remain elevated through 2017. Our forecast in our expense run rate per quarter will be in the $100 million to $105 million area and expect that to be sort of the quarterly run rate going forward, inclusive of those BSA expenses. And a large piece of that are professional fees that we're paying outside providers and those fees will disappear once we resolve our BSA issue here. If you strip away those professional fees, look at our run rate, we expect that to be in the 97 million to kind of 98 million area, which implies a 55% core efficiency ratio. And that number has been pretty consistent in terms of what we've guided but it really is the BSA resolution effort that's been a moving piece here. And we're trying to provide the best guidance we can but it will remain elevated 100 million to 105 million going forward per quarter and we do expect in the second quarter probably will be towards the higher end of that range, Mark.

[Domenick Cama:]

Hey Mark, it’s Domenick, if I can just add to that. One of the issues that we face, as Sean pointed out we are improving and increasing our staff in the BSA side. And as we go out and hire people, that gives us the ability to reduce our reliance on professional expenses, because we're using consultants to augment the staff right now. So the difficult thing that – Sean gave the range of 100 million to 105 million is based on the faster that we can hire people and train them and put them in place, then less reliance on consultants and that will move the number down closer to $100 million.

[Mark Fitzgibbon:]

And then I noticed on, you guys hired I think 56 people this quarter. How many of those would you say are related to the BSA, sort of risk management compliance stuff?

[Domenick Cama:]

Probably 35.

[Mark Fitzgibbon:]

And do you have any update on when you think you might be able to get out from underneath this agreement?

[Domenick Cama:]

We don't, Mark. I think what I've said publicly when I'm out on the road is that our best expectation to be out of this thing is probably the end of the year in 2017, and worse is probably the end of the year in 2018. So we kind of hedge our bets there. Kevin will call it the first quarter of 2018 but that's how we're handicapping it at this point.

[Mark Fitzgibbon:]

And then I wanted, if you could help us think about the margin a little bit as well. It strikes me that it probably will be under a little bit of pressure in coming quarters. Is that the right way to think about it?

[Domenick Cama:]

It's dependent on what happens, the rate environment here we expect full year 2017 margins to be in the 290 range, assuming two more rate hikes in 2017. So some additional pressure. But on the positive side of that, what I will say is that prepayment penalties income, it pretty much has bottomed out, I think there's more upside than downside there. In the new production volumes, especially in the multifamily, commercial real estate loan production is generally coming in at higher levels than current yield. So we do have some positives that do offset some of the rising impact of borrowing and deposit costs.

[Operator:]

The next question comes from Dave Rochester of Deutsche Bank.

[Dave Rochester:]

On the NIM guide, that it includes prepayment penalty income, is that right?

[Domenick Cama:]

That's right, yes.

[Dave Rochester:]

And then I missed what you said on the rate hike assumptions, are you assuming anything else for this year?

[Domenick Cama:]

Two more rate hikes for 2017

[Dave Rochester:]

What's the timing on those?

[Kevin Cummings:]

We’ve kind of run it both ways, Dave, one in June, one in December; one in June, one in December, kind of end up in the same spot.

[Dave Rochester:]

And then switching to capital, how are you guys thinking about the buyback going forward and if you could just talk about anything you’re looking for before you start those up again? That would be great.

[Kevin Cummings:]

We’ve remained out of the market, as you know -- if you look back to what we've said in the previous quarter, a pretty big bump from the post-election and a lot of talk around tax reform et cetera that has been driving and fueling stock price gains. We have been kind of waiting to see how that plays out and see how permanent that is, and trying to get a little bit more clarity in terms of what's happening there before we get aggressive or go back into the market buying back stock. But we will look for opportunities going forward here to buy back stock if it presents itself. I see the market is down a little today and if we’ve got some power there and we will reenter the market, if we think it makes sense.

[Dave Rochester:]

So, but I guess that the major thing you're looking for is just some kind of actual action out of Washington whether it’s on tax cuts or –

[Kevin Cummings:]

A little bit but time has helped. As we've gone further out, the stock price gains have kind of held or have been a bit more consistent, we feel more confident about going out and where currency is trading relative to others and being in a better position to evaluate where we are relative to others. And feeling more confident about buying the stock back at these levels.

[Domenick Cama:]

So Dave, it’s Domenick. So really clarity on bank valuation really is what it comes down to – understand what the right numbers are.

[Dave Rochester:]

And then switching to loan growth, that was great this quarter. If you could maybe just talk about your outlook for next quarter. It sounds like the pipeline would be strong and then where are you pricing new products in multifamily and CRE, that would be great?

[Domenick Cama:]

Dave, in terms of our outlook for next quarter, I know we gave guidance originally at $1.4 billion. And so first quarter came in higher than expected. I think it's too soon to call for any significant increase in that guidance but just if you use the numbers and say that $1.4 billion would generate about $350 million for the quarter, I think it's still too early to say that that number is going to continue to increase through the year. So I am going to stay with the $350 million for the quarter.

[Dave Rochester:]

And then just one last one if you could update us on where the CRE concentration is now, and if you thought about any other internal limits on that, some other banks have announced some harder limits that they have there.

[Domenick Cama:]

In terms of our own concentration we’re just under 400% on CRE. In terms of the limits we’re certainly not in the zip codes of the institutions that have announced what their caps may be. So I am hesitant at this point to say where our own internal policy calls for us to be.

[Kevin Cummings:]

Dave, I am just going to add on to that. Because there is a difference between our bank and holding company concentration ratio, so we came in for the quarter CRE concentration at the bank level 397 and at the holdco, we are at 360.

[Operator:]

The next question comes from Jared Shaw of Wells Fargo Securities.

[Jared Shaw:]

Maybe on the breakdown on multi-family, what you said 85% moderately priced, 15% higher price. Can you give a breakdown on what portion of the portfolio is rent controlled or stabilized and what portion is pure market rate?

[Kevin Cummings:]

Yeah, I don't have that stuff with me but I can get it to you, that we have it in this.

[Jared Shaw:]

And then on the BSA, on the expenses around regulatory spend, was that all BSA or was there also some increase of spending around the commercial real estate concentration and maybe any additional systems or operating improvements you had to make there? And then secondarily, also was there something that new that happened this quarter because that run rate seems to be a little higher than the conversation we were having last quarter?

[Kevin Cummings:]

It's primarily BSA related, Jared, and just in terms of the number being up, I think we've mentioned that we had an exempt going into the latter part of the year and we got some comments back from the FDIC on what our plans were, and we have had to step up our game a little bit more. So we did make some changes going towards the latter part of 2016 in relation to the feedback we got from the FDIC and it’s mostly around the number of staff that we needed in order to continue to try to remediate this.

[Sean Burke:]

And the other thing I would add, Jared, though if you look at our Q4 expense run rate we try to guide people there, was abnormally low at $89 million, what happened in the fourth quarter and we reduced our incentive compensation and froze our pension plans in the fourth quarter, and there was an impact -- pretty much an entire year impact flowing through the fourth quarter or for those items. And when you add back sort of the normalized that expense run rate, you’re probably something closer to $93 million. And when you think about the BSA related fees that we had in this quarter and back those out, then you’re comparing a $93 million number from Q4 to a $95 million number in Q1. So that’s the way I'd like to look at it on a core basis, taking out the noise and some of the onetime items, in the fourth quarter and then also trying to strip out some of the BSA related costs.

[Jared Shaw:]

And then just finally, certainly I guess back on the CRE side, have you changed any of your more macro loss assumptions as you're coming up with your methodology for multifamily or CRE for allowance or has that been unchanged?

[Kevin Cummings:]

I mean in terms of allowance, what drives this generally is the economic trends, charge-off trends and some of the non-accrual trends, those specifically are kind of what’s driving more allowance down slightly. We were at 1.2, 1% total loans; now we're down to 1.18% of total loans. And generally within the multifamily and CRE class, it's been pretty stable in terms of the allowance that we're putting away on those products.

[Operator:]

The next question comes from Collyn Gilbert of KBW.

[Collyn Gilbert:]

Just on the BSA investment and obviously the drag is going to put on, on expenses and just the overall returns, how are you thinking about where the overall company’s returns could go and how that’s maybe changed from what you would have thought going into this three years ago, and are there other things that you can be doing sort of structurally to kind of get back some of that lost income just to improve some of those profit building metrics?

[Domenick Cama:]

Well, Collyn, in terms of our business, I mean our business is in transition now. I mean we continue to invest in our business lending, our C&I lending capabilities and that's probably the positive -- that is the positive that should come out of this quarter and that is that, despite the investment in BSA which we’re required to make and we have to make. The business is strong, our brand awareness here in the Tri-State area is growing, we’re putting more loans on, we’re building relationship banking. Truthfully when I look at the last few years, and this is in all deference to other players, it's easier to grow a multifamily portfolio; that's easy. What we're doing now is building a C&I in a relationship banking platform that is going to result in higher income, lower deposit costs, and quite frankly higher valuations on the bank side. So it's too early to say that hey, you know something's wrong here, it really isn't. We continue to be strong in the market. As I said our brand awareness is up and people know that we're the largest bank headquartered in New Jersey and want to do business with us.

[Kevin Cummings:]

I think, Collyn, when you look at -- I made mention of our three year plan right after we did the second step, and we, with the $7.5 billion in growth, we’re hitting all our growth targets on the asset and loan side. We’re hitting our ROE numbers in that three year plan. We’re hitting our net income numbers without an acquisition, assumed acquisition of $2 billion. So what we've lost in our ability of the M&A we've certainly made up in volume without any dilution to a merger. So we've basically outperformed where we thought we would be today versus our original plan post second step in October of 2014. So I think to build-out the branches, de novo branches the business is good. But we didn't anticipate some of these buildouts in the BSA and some of the changes in the regulatory environment with respect to this multifamily process. We love the portfolio, as you peel away the onion and do more analytics, it certainly gives us confidence that that it's a diversified portfolio. The average loan in the multifamily portfolio is under $4 million. As we do these analytics, you can see where the higher priced exposures are in areas like Brooklyn and in the Upper East Side of Manhattan where the higher dollar luxury rentals are. We have a good handle on that now and our analytics and things are improving. So I think we're well positioned to continue to grow and we have to get out of this BSA doghouse and we're going to -- we're fighting the good fight here and we have to do what we have to do to move on.

[Collyn Gilbert:]

And then just in the context of that, do you have a thought as to what that makes it look like in your loan book as you look out maybe over the next year or two just given the good growth that you’ve seen on the C&I side, like how quickly can you change that mix, do you think?

[Domenick Cama:]

Well, today inclusive of owner occupied we have $2.1 billion in C&I type loans and on the $19 billion portfolio we're looking at 11%. So we could see that continue to grow I think longer term, it's hard to say where we think it will be at the end of the year; we're projecting $600 million in new growth for this year. But overall in terms of portfolio, it's probably going to sit somewhere in the 15% to 20% of the portfolio -- of the total loan portfolio.

[Collyn Gilbert:]

And then just one final question, Sean, just curious or anyone really, in your NIM thoughts, like what does that assume in terms of deposit pricing pressure and overall deposit – and that mix deposits – mix deposits look?

[Sean Burke:]

Yes, well we are liability sensitive and if you look at our deposit mix, it’s something that has been improving but we still have a lower percentage of non-interest bearing checking account as a percent of total deposits than a typical commercial bank. And as we build out our C&I business, that has really helped contribute to the growth in non-interest bearing deposits. So we've gotten better but we're still under pressure as rates rise and we will see deposit costs move. And in terms of betas, we’ve kind of analyzed it, if you look at our weighted average basis of our betas, it's probably in the 40% area, Collyn.

[Operator:]

The next question comes from Matthew Keating of Barclays.

[Matthew Keating:]

Kevin, I guess going back to second step, post that transaction, you mentioned there was sort of half time investors. And I guess just in keeping with that sports analogy, how much time is left on the clock here as you kind of complete the transition? Are we kind of still stuck in the third quarter? Or -- and I guess related to that, you mentioned that the bank is sort of hitting its profitability targets, that if you kind of expected three years ago. What are the profitability goals over the next three years that we should be focused on? Thanks.

[Kevin Cummings:]

Good question. I think when I step back and look in the next three to four years, we're looking at $1.5 billion in growth over the next four years, $6 billion, get to $30 billion, do one, two or three acquisitions for another $5 billion and get to that $35 billion mark, between $30 billion and $35 billion. And again just like the first step, our goal was to get to double digit ROE over that period of time, leveraged to capital down to -- back then we leveraged it down under 8%. This time I think we'll be in the 9% area because of the different capital requirements. And when you look at the first step, it took us from 2005 to 2014, almost eight years -- plus almost nine years and this time around if we do it over the next four, five years it would be just about eight years So I think in our own expectation this is where we want to go, we want to create something special, create a legacy here for ourselves over the next four years.

[Matthew Keating:]

And what would kind of cause the bank to re-evaluate that, if there's just increased regulatory burden that, that becomes just too expensive for the bank to continue invest in and then we'll look to maybe employ its capital and look to partner with a large institution or what might change that strategy at this point?

[Kevin Cummings:]

I think it's always the math. And I think like Domenick says you're buyer and seller every day and when you look at that those situations and the opportunities in the marketplace and our strategic planning, we have a plan where we want to go. And as we hit those numbers and as we move forward you have to consider that and what might be available from a strategic point of view as an option say to sell. And as you look at that and the math that's involved, what is the macro risk of getting say from where we are today or in the future to some other price point. And we have to evaluate that, management and board are significant shareholders and we're always looking at the best interests of our shareholders.

[Domenick Cama:]

No, Matt, I was again just going to reiterate some of Kevin's points but the two points that I wanted to make in addition to that were that, at this -- we're always looking for what the future will hold and obviously looking at strategic partners is something that we talk about all the time. Obviously we still sit here with capital just at about 13%. And also we have to recognize that the bank is $24 billion in total assets. So on one hand we have -- still have some excess capital that we would not be paid for if you will. And second is, there are not that many strategic partners to look at $24 billion to $30 billion institutions. So I just want to make that point.

[Operator:]

The next question comes from Matthew Breese of Piper Jaffray.

[Matthew Breese:]

I apologize, I hopped on late but I did have one other question. I saw in the release that classified loans were up a bit this quarter, up to 1.58% of total loans. And I just wanted to get a sense for what was in there, what was moved over and if there is any color around it, that’d be super helpful. Thanks.

[Domenick Cama:]

Sure, Matt. One, you have to recognize that we're starting from a low base to begin with. And two, I’ll point out that our past dues have been steady. But what I will say -- there has been a slight increase in the classified number there. As we place more weight on debt service coverage as we go through the annual loan review process as things come due, we look at those. Just given the increase in property values or the increase in real estate values out there, we think that's a prudent shift and we are saying some more of our portfolio go into that bucket but we still feel good about the trends that we look at in terms of past dues and non-accruals.

[Matthew Breese:]

So would you say the change there was more due to internal reclassification and new standard versus deterioration in cash flows or performance of the loans?

[Domenick Cama:]

Yeah, I think that's what I'm referencing, and I think if you did see deterioration you would start to see that pick up in terms of people not paying on those loans. So if we started to see a pickup in past dues either in the 30, 60, 90 day buckets, then I think we're going to start to get alarmed.

[Matthew Breese:]

So with that in mind do you feel like that the classified loan level here is not necessarily sign of future deterioration, it might just hang out here because of that -- because of the change?

[Domenick Cama:]

So we're in a lower rated bucket, so there's always a risk there. So we are classifying this as a higher risk but we think a lot of what resides in that bucket is very well secured. And if you look at the LTVs that we have, with respect to those loans we think a lost content in that classified bucket is very low.

[Kevin Cummings:]

And our process is evolving, we're hiring new people, we're getting new inputs into it. We’re discussing it with both our auditors and our regulators and this process, with all the emphasis on the CRE and the multi-family, we just did a project here where we looked at close to 500 loans, covered almost $3 billion of the portfolio and basically the majority of it, actually if using just the debt service, it improved the rating. So we're still in transition here and we've got to be careful because you have accounting principles and things to be concerned with .So we're managing our way through that and actually getting more data to hopefully improve the process over time and make sure all the constituents that we’re dealing with are happy.

[Operator:]

The next question comes from Jake Civiello of RBC.

[Jake Civiello:]

Sean, you mentioned your expectations for 1 to 2 more Fed rate hikes in 2017. And with that as a backdrop, that would imply that deposit pricing pressure really should only increase as the year progresses. So how are you thinking about your willingness to get even more aggressive in deposit gathering today versus later in the year when rates could potentially be even higher?

[Domenick Cama:]

Hey Jake, it's Domenick. I can help with this. Certainly, you're right on target. And what we're looking at -- when we look at our deposit-gathering efforts, really, they've been good. Now I'll say that -- and I'll qualify that statement with the fact that where we've seen a decline is in our CD portfolio. And so what we've done is we have priced some CD products in an effort to stem that loss in CD balances. So we've already done what -- the question that you're asking, and that is to change our pricing such that we could bring new deposits in. Now be it at a higher cost in the CD category, but at least, that will stop the outflow of deposits in that category.

[Operator:]

The next question comes from Laurie Hunsicker of Compass Point.

[Laurie Hunsicker:]

I wanted to go back to expenses for a moment, because I wanted to make sure that I had this right. So as we think about where you end this year as we look forward to 2018, round numbers, you'll be about $20 million less. I'm talking just the BSA AML component of the people that you're outsourcing to. Is that a right way to think about it?

[Kevin Cummings:]

I'm not ready to necessarily forecast 2018 but I hear your question, Laurie. So the BSA costs that would imply in some of the numbers that we provided, implies about $20 million in BSA related professional fees, that is correct.

[Laurie Hunsicker:]

And then on the tax line, did you guys have any stock based awards that were recognized in the tax line that drove the rate lower this quarter?

[Sean Burke:]

e had a little bit – a tiny bit, it was not that meaningful. We did adopt the accounting standard in the fourth quarter of 2016 unlike a lot of companies. I believe the number was -- if it were more than a million, I'd be surprised but it's probably in the $1 million area, Laurie.

[Kevin Cummings:]

Laurie, it was also reflected in 2016 first quarter. We went back and restated the first, second and third quarter on the adoption in the fourth quarter of last year.

[Laurie Hunsicker:]

And then just a little bit of a more macro question is, if Peter Carlin is new to your board, obviously you're not new in working with him as you mentioned. You've been working with him for three years. Strategically has anything shifted in terms of your approach, as you approach how you look at your bank going forward and where you’ll take your bank especially with respect to M&A?

[Kevin Cummings:]

No, I don't think anything has changed. We continue to expect to be in the M&A space once we get out of BSA jail if you will. So I think I saw your comment in your release, I think you're right on target.

[Laurie Hunsicker:]

And then just to extrapolate off the question that Matt had asked you, with respect to growth in acquisitions and you had mentioned part of it as we look over the next half of your life, if you will, but one to three acquisitions taking you to the $35 billion mark, from assuming 30 billion is organic growth. So potentially the one to three acquisitions you're looking small, one, two, three billion or are thereabouts, is that the right way to be thinking about this?

[Kevin Cummings:]

Yes, that's the right way to think about it.

[Laurie Hunsicker:]

And then just one last question around acquisition. What would be the largest asset size deal that you would potentially consider at this point?

[Kevin Cummings:]

Laurie, it's hard to say. I'm not sure -- there are so many factors that go into acquiring a bank and setting up a strategic partner that it’s just hard to say. So I’d rather try to stay away from an answer to that question.

[Laurie Hunsicker:]

And then sorry just actually one more question. On branches, so you mentioned last three years 23 branches which we knew you had done a de novo strategy. Are there more that are slated to open or are you on a pause to let those digest or how are you thinking about de novo branching?

[Kevin Cummings:]

We have a few more, 2017 I think we're projecting five branches to open and we’ve already opened one. So we have one set to open over the next few weeks and they’ll put three for the remainder of the year. I think the next two years the branch openings will be muted as compared to what they were in 2016. I think we are projecting five and four. End of Q&A

[Operator:]

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

[Kevin Cummings:]

Okay. Well, I want to thank you all for your participation on the call. It’s been a good first quarter, we’re right out of the box with strong loan growth, good earnings and we look forward to a successful 2017. Thank you all for your participation and have a great weekend. Talk to you soon.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.