Investors Bancorp, Inc.
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Good morning and welcome to the Investors Bancorp Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. We'll begin this morning's call with the Company's standard forward-looking statement disclosure. On this call, representatives of Investors Bancorp Inc. 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, are difficult to predict and 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 included it's 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 sections 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, Denise, and good morning and welcome to the 2017 third quarter Investors Bancorp Earnings Call. The Company and the bank continue to execute on its strategic business plan. We posted improved earnings for the quarter ended September 30, compared to the prior quarter. Our asset quality improved, we've reduced operating expenses, recorded strong deposit growth and declared a 12.5% increase in our quarterly dividend from $0.08 to $0.09 a share. Through our organic growth, stock buybacks and dividends and by maintaining a strong credit culture, we have leveraged our capital in a prudent manner. Our tangible capital ratio at 9/30/17 is 12.9%, down from 19%, almost 20% in June of 2014 when we completed our second step offering. Our dividend over that period of time has gone from $0.04 a share to $0.09 a share. We have purchased over 67 million shares in our stock buyback program for $804 million at an average price of $11.95 per share. Despite some headwinds due to regulatory BSA AML issues we continue to execute on our strategic plan of diversify our balance and leveraging our capital from the from the second step in May of 2017. The bank recorded earnings of $45.8 million or $0.16 per diluted share as compared to $39.6 million or $0.14 a share in the second quarter of this year. And $49.9 million or $0.17 per share for the quarter ended September 30, 2016. I should remind you that in 2016 third quarter results were restated at year-end. For the adoption of ASU 2016-09 and reflects $6.4 million tax benefit in the third quarter of 2016. Without that benefit EPS for the third quarter of 2016 was $0.15 a share on our earnings of $43 million. For the nine months ended September 30, 2017 net income totaled $131.5 million or $0.45 per diluted share compared to $139.7 million or $0.46 a share. The impact of that accounting change on year-to-date earnings was $0.01 in 2017 to $0.44 a share and $0.03 a share in 2016 to $0.43. Loan growth slowed in the third quarter of 2017 as the market cooled a bit as we saw a transaction volume down about 15% to 20% across our markets from the prior year and a conscious effort on the bank spot to increase our pricing rates during the period to maintain margins. As a result our CRE and multifamily portfolio of the client for the quarter $54 million and $72 million respectively. We did see improved pricing on our September originations as the average yields on those originations was 3.89% for CRE and 4% for the multifamily versus 3.83% year-to-date for the CRE and 3.66% for the multi-family originations as of June 30, 2017. For the other loan categories, C&I, construction, residential, and consumer, we saw an annualized growth of 11.7% for the quarter, and where residential loans increasing $116 million, construction $38 million, C&I $33 million, and consumer loans increasing $26 million. On the asset quality front, our ratio of non-accrue loans to total loans decreased for the quarter from 89 basis points to 63 basis points. As previously mentioned on these calls, we had one relationship of $48 million in multiple loans that we placed on non-accrual in the second quarter. In September, at the end of the month, we sold the loans at no loss to the bank to a third-party without financing to remove the loan from our portfolio. Our credit quality remains strong as net charge-offs for the quarter were $1.7 million compared to $6.9 million in the prior quarter. As a result of slower loan growth and our decrease in our CRE and multi-family portfolios, our provision for loan losses was $1.8 million for the quarter versus $6 million in the second quarter and $5 million for the quarter ended September 30, 2016. We have no new significant relationships in our commercial non-accrual category. We did see an increase in our 30-day delinquencies in CRE from $1.9 million at June 30 to $32 million at the end of September. This increase relates to three loans, one for $25 million which is under contract for sale to close in the late fourth quarter, and will be extended. And two loans for $5 million secured by Walgreens - both properly is secured by Walgreens which are in the process of being renewed and extended for another five-year term. In the multi-family portfolio that 30-day delinquency group is performing well, but one of those loans are backed off non-accrual status and the other loan for $4.3 million is in the process of being renewed, so there are no problems in those portfolios at this time. Asset quality remains strong as we continue to monitor our credit quality and continue to be proactive in resolving our problem credits. We have invested significant resources within our credit risk management process as we have moved from a community bank mile to a full service regional commercial bank. Our data analytics have improved and our loan approval process will be streamlined as the base business and credit functions work together to service our growing customer base. Deposits are up for the quarter by $834 million with CDs increasing $462 million and core deposits up $372 million. This increase outpaced our loan growth for the quarter reducing our loan to deposit ratio from 120% at March 31 to 118% at quarter end. Despite the increase in CD funding with a promotional rate of 1.6%, our net interest margin remained flat at 2.87% for the second and third quarter of 2017, so our margin remained flat and we are pleased with that for the quarter. Now I'd like to turn the discussion over to Sean Burke, our CFO will give more color on the financial results for the quarter.

[Sean Burke:]

Thank you. Kevin. I will be brief. Net income for the quarter was $45.8 million as Kevin alluded to $0.16 per share representing 14% earnings per share growth from the previous quarter. Net interest margin of 2.87% was consistent with the second quarter as higher loan yields were offset by increased deposit environment cost. Prepayment penalty income totaled $5.4 million for the quarter compared to $3.1 million in Q2. Non-interest expenses totaled $103.3 million, a decrease of $3 million from the second quarter due to a decrease in professional fees related to BSA remediation efforts, partially offset by an increase in compensation costs. Our provision for loan loss totaled $1.8 million for the quarter compared to $6 million in Q2. Our non-performing asset ratio declined to 0.58% at September 30 from 0.80% in June due to the disposition of our previously disclosed commercial loan relationship. Our asset quality charge-off trends, allowance coverage and capital ratios continue to be strong relative to peers. Deposits increased $834 million during the quarter, resulting in a decline in our loan to deposit ratio from 124% to 118% at September 30. Lastly, we repurchased 2.5 million shares totaling $33.2 million and also increased our dividend to $0.09 per share. Now I'd like to turn it back over to Kevin for some concluding remarks.

[Kevin Cummings:]

All right, third quarter results were good, but we're still not satisfied as we move through our regulatory challenges with BSA and other matters. We are monitoring our progress on this front and continue to make progress. Professional fees relating to BSA remediation totaled $16.7 million, year-to-date with an after-tax impact of $10.9 million for 2017. Our teams are working diligently on the BSA projects and we are on a journey to put it behind us in 2018. We continue to look at everything we do to improve our efficiency and our operating results. With that M&A, we will continue to grow organically. We have grown total assets from $20 billion at June 14, right after our second step to almost $25 billion at quarter end. We have strong momentum in our deposit and loan franchises and our brand continues to expand through our marketing and community efforts. We are good stewards of capital, as evidenced by the 2005, 2014 period and our first step results, leveraging that $500 million in capital to 8.5 years and result in one of the most successful second step valuations with a $2.2 billion capital raise in 2014. At an approximately 6% return on tangible equity for the quarter, we need to continue to grow and manage your operations to leverage the capital and improve our results. Our goal is in return on tangible capital of 9% to 11% with 8% to 9% tangible capital ratio. We are focused on these goals and creating long-term value for our shareholders. Our employees are engaged and committed to our mission and vision. Our regulatory BSA issues continue to improve and our teams are making progress in remediating the findings and reducing expenses. We are cautiously optimistic that we move past these issues in 2018 and begin looking at potential M&A opportunities. But let me emphasize even without a transaction, we will continue to grow organically at approximately $1.5 billion a year, which in four years should get us to our strategic goals. Our community activities and brand recognition have never been better in both our New York and New Jersey markets. Our employees are leaders in their community and continue to make a difference. I'm proud of their efforts and what they do every day in the passion that they bring to their jobs. We have transformed the community through over the past years into a significant regional bank in the most attractive markets in the country. Our franchise continues to grow and our brand has never been stronger. Our employees are on a path of continuous improvement with the ultimate goal of creating long-term and I mean that long-term value for our shareholders. It is our mission. It's always been and always will be. Now I'd like to turn the call over to questions from our analysts. Thank you very much.

[Operator:]

Thank you, Mr. Cummings. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Dave Rochester of Deutsche Bank. Please go ahead.

[David Rochester:]

Hey, good morning guys.

[Kevin Cummings:]

Good morning.

[Sean Burke:]

Hi, Dave.

[David Rochester:]

On the NIM, I appreciated all the color on the origination deals for the multifamily and CRE in 3Q. Was just wondering where your pricing is today, post a current steepening in recent weeks?

[Sean Burke:]

The commercial loans Dave, is that we are asking?

[David Rochester:]

Yes carrying and the multifamily, just [5 ones, 7 ones?]

[Sean Burke:]

[5 ones are 3.38 and 7 ones are 3.58] and that's multi-family.

[David Rochester:]

Okay, and then for commercial real estate?

[Sean Burke:]

It's an eight spread, so it's 3.50 and 3.75.

[David Rochester:]

Okay. So it sounds like you changed pricing back and was that to drive stronger growth trends in 4Q effectively?

[Sean Burke:]

Yes. Although, what I can say Dave is that it's difficult to lower rates in the early part of the fourth quarter and then expect that you can close that volume by the end of the quarter. I mean terms of what we're looking at now and I looked at October so the activity there. I mean we believe that we can get pretty close to our original budget which was $1.4 billion that is if you look at what we've originated year-to-date it's about $1.1 billion. So we need to get about 300 million done for the fourth quarter to get us to our original numbers. But we do expect that those lower rates that were instituted in the early part of the fourth quarter will start to drive some additional business in the beginning of 2018.

[David Rochester:]

Okay. Great. It's sounds like you still think the one for is good and then that sort of sets you up well in terms of the pipeline going into the first quarter?

[Sean Burke:]

Yes.

[Kevin Cummings:]

Yes.

[David Rochester:]

Okay. Great. And I notice that the loan yield X prepay this quarter was up I think 7 basis points? Was there any movement in fees and that increased or was that just the higher loan origination yield you were talking about the 4% from multi and 3.9% roughly for CRE?

[Sean Burke:]

Yes, it was just Dave was the impact of the higher rates on our rate sheet.

[David Rochester:]

Okay. And then I guess just putting it all together what is your outlook for NIM X rate hikes in 4Q.

[Sean Burke:]

David, it's Sean. We're looking at 3 to 6 basis points of margin compression with the lower end of that range appearing more likely today.

[David Rochester:]

Okay. And then what would be the impact that you guys are estimating right now for the next rate hike roughly?

[Sean Burke:]

I don't have that in front of me Dave, we can certainly talk about 2018 in our forecast will be prepared to do that on our next earnings call.

[David Rochester:]

Okay. And then just one last and if I could on expenses you guys had a big step down the BSA expenses this quarter? Are you expecting that to continue to stair step down here in 4Q and then as we roll into the first quarter is most of the heavy lifting done at this point do you think.

[Sean Burke:]

I think for the fourth quarter we probably will be on par with where we were for the third quarter, but we should start to see that step down in 2018.

[David Rochester:]

And then there's a common of stable BSA expenses extend into the rest of the expense base. So basically stable expenses in the 4Q from 3Q overall?

[Sean Burke:]

Yes, I think what we're looking at is to be somewhere I'm going to say 104 to 106 for the quarter.

[David Rochester:]

Okay. Great. Thanks guys. Appreciate it.

[Operator:]

The next question will come from Austin Nicholas of Stephens Inc. Please go ahead.

[Austin Nicholas:]

Hey, guys, good morning. Thanks for taking my questions.

[Kevin Cummings:]

Thanks Aus.

[Austin Nicholas:]

I think most of my questions were already answered, but maybe just focusing a little bit on M&A you know after BSA gets lifted? How are - what is your strategy there you know how should we be thinking about what potential acquisition targets look like in terms of size business mix and you know maybe just private versus public and what is really most likely given your valuation and your CRE concentration?

[Sean Burke:]

I think Austin that first and foremost obviously we're always looking for in market transactions that can provide good core deposits for us. I think that's really first in terms of valuation obviously we want to ensure that any deal that we look at or could do would not have any significant impact on - would not have any significant dilution to tangible booking and we would always look for some reasonable payback period. So I know there is always a question about where our valuation is, and our valuation is getting better I mean if I just look at it over the last month or so I mean we're talking about it being somewhere between 135% to 140% of book. Now what that may mean for us is that it may be more difficult to do larger deals and we may have to look towards smaller deals given where we see the pricing for those types of institutions.

[Austin Nicholas:]

Sure. Make sense. I appreciate the thoughts there. Maybe just on your credits been good this quarter. Anything you're seeing looking out that maybe give you a step up and kind of your run rate of credit which is now been pretty low tide of last quarter?

[Sean Burke:]

I don't see anything. We don't see anything, obviously when you look at the decrease in our provision it certainly considers what we see coming down the pike. Truthfully, our credit has been good. Kevin talked about that credit. It was not difficult to unload that credit. It was a very good one. And as Kevin said, we got out of that thing without losing a penny. So I know we had some conversations even with investors at past meetings who've asked us about it in and we really don't see anything coming down the pike.

[Austin Nicholas:]

Okay. That's helpful. And maybe just one quick last one. I know there's been some proposed simplified capital rules put out by the regulators about a month ago as it regards to some commercial real estate, ADC, HVCRE. Have you taken a look at if there's any advantage to any meaningful extent to your capital ratio then how that makes you think about your CRE concentration?

[Sean Burke:]

I am familiar with the guidance that you're referring to. We haven't spent a lot of time analyzing the ins and outs there, but looking at our portfolio, I don't think that would be a significant benefit to us under that new structure. But obviously, it becomes more real or more imminent, we'll take a closer look at that, but I don't expect that to have a significant impact on our capital.

[Austin Nicholas:]

Understood. Thanks for taking my question guys. That's all I have.

[Sean Burke:]

Thank you.

[Operator:]

The next question will come from Mark Fitzgibbon of Sandler O'Neill. Please go ahead.

[Mark Fitzgibbon:]

Hey guys, good morning.

[Sean Burke:]

Good morning.

[Mark Fitzgibbon:]

First question I had for you is on cash balances. For you guys and for some of your other peers, particularly guys that have high loan to deposit ratios, it seem like cash balances really soared, any particular reason for that?

[Sean Burke:]

But we had the campaign, Mark, we raised about $800 million in deposits during the quarter in that campaign, and obviously, loan growth was down, so we just weren't able to get it out fast enough. We bought some additional securities. We brought securities up a little bit, but it's just a matter of raising the deposits and not getting it out fast enough in terms of loans.

[Mark Fitzgibbon:]

Okay. And then just sort of sticking with that, Dom. Can you talk a little bit about the deposit promotions you have right now, what kind of rates those are at?

[Domenick Cama:]

Yes. The deposit promotion we have going on right now are intended to capitalize on the effort in the 15-month program. We're out there now offering a cash offer on driving more non-interest bearing checking accounts into the bank. The campaign is specifically targeted at those customers who came in who opened the new CDs, however don't have another checking account or account with us. And so we went through a mailing campaign and calling campaign in order to generate some business there. So that is continuing. That started in the early part of October, but it's all with the objective of driving more non-interest bearing balances into the bank.

[Mark Fitzgibbon:]

What is the rate on that?

[Domenick Cama:]

There is no rate. They are non-interest bearing.

[Mark Fitzgibbon:]

I'm sorry, I apologize. You were talking about a 15-month program.

[Domenick Cama:]

The 15-month program is over. That ran through the summer. That ran from July through the early part of September, so that was the campaign that we raised $800 million. That was a 15-month program at 1.60%.

[Mark Fitzgibbon:]

Okay. And then I wondered if you could share with us the size of the pipelines today and maybe the average rate mix?

[Domenick Cama:]

The pipeline today is about - this is commercial pipeline, real estate and C&I, is about a $1.1 billion that's up about 17% from where it was at the end of June. In terms of the rate, the average rate is about 4% on the CRE piece and about 4.38% on the C&I piece.

[Mark Fitzgibbon:]

Okay. So assuming loan growth picks back up next quarter, should we assume the provisioning will also kind of normalize back in the fourth quarter?

[Kevin Cummings:]

Should…

[Mark Fitzgibbon:]

Okay

[Kevin Cummings:]

Depending on the type of product we originate.

[Mark Fitzgibbon:]

Thank you.

[Operator:]

The next question will come from Matthew Breese of Piper Jaffray. Please go ahead.

[Matthew Breese:]

Good mooring, everybody.

[Kevin Cummings:]

Hi Matt.

[Sean Burke:]

Good morning, Matt.

[Matthew Breese:]

Just stick on the pipeline and some of the growth we're seeing. It seems like the rates mentioned in the pipeline and for the quarter were a bit above the 5 one rates mentioned from the family in CRE. So I just want to get a sense for the duration that you're typically underwriting these days. Is it 5 one or is it really 7 and 10 one?

[Sean Burke:]

Yes, it's right in that. It's both the five one and seven one, Matt, it's right there. As I said, if I look at the pipeline today we really haven't had a significant impact from the reduced rate yet hearing that is has not really quite hold yet. So yes, your point is - our rates are lower, but the pipeline seems where it was last quarter. It's about right, but it should, but in your point, it should start to trend down as we as the pipeline becomes more mature with those lower rates.

[Matthew Breese:]

Okay, so it's predominantly five and seven. It's not so much seven. Is that accurate?

[Sean Burke:]

Yes, that's accurate.

[Matthew Breese:]

And then as I think about what we saw this quarter was a bit slower growth. The outlook is for $1.4 billion, but I think Kevin you said that going forward perhaps like $1.5 billion a year. We've heard a lot about our transaction volumes in New York City in your neck of the woods how do you how do you offset that with a bit higher long growth levels and does it come from other areas besides traditional CRE and multifamily to get there.

[Sean Burke:]

Well, certainly we're going to be - we're focusing on C&I and diversifying our balance sheet. So that'll be a focus. We're also looking for opportunities in the residential lending and in consumer lending.

[Kevin Cummings:]

Matt, when we look at our pipeline, if you look at our pipeline say a year or 18 months ago it would have been dominated by theory, these days just to give you a breakdown, the C&I pipeline is about $500 million and the CRE pipeline is about $600 million. So you can see there's a more even distribution of the pipeline coming from C&I.

[Matthew Breese:]

Got it, okay. And so you can offset some of that lower transaction volumes with C&I essentially. Nice so we're trying to do perhaps.

[Matthew Breese:]

Okay, and then Kevin I think you also mentioned that you feel a good about exiting than 2018 and I know you can't go into it too much, but to the extent possible, could you talk just about you know why that feels like a reasonable goal and update us on some the conversations and how things are progressing there?

[Kevin Cummings:]

Well, we continue to have conversations. We would have regular use - regular basis and we're making progress. I mean a lot of effort has been put into it. You can see it in the expense line. The headcount issue, where addressing the issues and we're working on all the things and I look back and things that are coming up and I our look back the findings and that are minuscule, or no issues of earning are going to seem to be coming up or almost 70% through that. And things are positive now. Having said that, a lot of the stuff that that what I said earlier on the call, the goalposts have been extended to feel gets bigger all the time. The expectation may change and we're managing our way through that trying to get ahead of that curve or working with you know a reputable consulting firm promissory and they've given us assurances that we're making good progress. So from what we hear both from our internal audit group and promontory, we're right on track to get there to where we should be. Having said that, their opinion doesn't matter, only one person's opinion is the matter, is the guy that comes in here next year to do the exam and we're working with that to communication with our regulatory agencies that are on site here all the time and we're managing that appropriately.

[Matthew Breese:]

Great, okay. And then I just wanted to touch on the buyback, we saw some shares repurchased this quarter, the stock is up a bit. So could you just talk a little bit about your willingness to repurchase here and then the levels you might be more or less aggressive?

[Kevin Cummings:]

Matt, at these levels it becomes less attractive to be honest I mean we've always talked about buying the stock around that 130% of book, stretch 235% of book and so that's where we are I would imagine that this recent run up is due to obviously the tax talk in Washington and while it has gotten a little better in terms of the certainty of it getting done we still sit here and we can't assume it's a [indiscernible]. So we're still going to be a little skeptical and we'll probably stay close to two levels of 130% to 135%.

[Matthew Breese:]

Okay. I appreciate it.

[Sean Burke:]

I'd just add to that we will be opportunistic what we'll see with the stock heads over the next couple of months and we will look to be opportunistic and but maybe at some point we'll level set in our levels would change in terms of where our appetite lies, but I think you know we're looking to deploy capital in an efficient manner and so the dividend increase that we had I think you can take as a sign that we thought that was a more efficient use and share repurchases right now.

[Matthew Breese:]

Got it. Okay. That's helpful. Thank you very much guys.

[Operator:]

The next question will come from Collyn Gilbert of KBW. Please go ahead.

[Collyn Gilbert:]

Thanks. Good morning, guys. Sean I guess my first question is for you on the NIM. So just trying to understand what occurred unexpectedly this quarter. And then last quarter I think you were looking for a down NIM 5 basis points to 7 basis points in the third quarter and obviously you guys came in flat. So just trying to see what happened that you did not anticipate three months ago?

[Sean Burke:]

Two things Collyn, one prepayments we're not always a science in terms of trying to predict that that does influence the guidance that we're giving and we're looking to be cautious around that because we don't want to get caught off guard. And then we're in the middle of a campaign we're raising money in a CD campaigns and just being cautious in terms of how much money we raise there because that could have had an impact as well. So I think it was the combination of those two factors that led to the guidance that we provided.

[Collyn Gilbert:]

Okay. And then if I take it now looking forward I hear your guidance again but just trying to think it through. So I would just think the remixing from cash into loans I'll be at what you're suggesting as a lower loan yield. But then also to maybe I don't know maybe you could help us with but the timing of the 800 million so that campaign is done and now you're focusing more on you non-interest bearing. I guess to me it sounds like the trajectory of the NIM should be better. Than what's you're guiding to. So just wanting to understand that and maybe again how you're thinking about the flow through of these sort of elevated the 160 deposits into the fourth quarter?

[Sean Burke:]

It could be I think again Collyn we're trying to be conservative here in prepayments or a big factor and we look at prepayment this quarter and it is a bit elevated relative to the prior quarter and so when we're providing the guidance we're thinking hey it might return back to that level and if you strip up repayments altogether our core NIM this quarter was down about 3 to 4 basis points. So we're looking to see something of a similar trend next quarter, but look certainly we could be surprised here and if things all play out in the right manner we could looking at a more favorable NIM, but the guidance that we're giving we think is conservative and that's where just told the group here that even though we're providing 3 to 6 basis points of margins compression and we expect to be on the lower end of that guidance.

[Collyn Gilbert:]

Okay. And then just you kind of touched on a bit on the deposit side. So obviously the new campaign is focusing on non-interest bearing deposits, but outside of that where do you sort of see the pricing pressure obviously the beta was up huge this quarter but part of that is because of the 800 million. But just in general I mean do you feel like you've kind of year now maybe at a cap on overall deposit rate and there's a catch up period that can come or do you think that the step up in ongoing deposit cost is still going to be pretty intense.

[Sean Burke:]

I think that - Collyn I think that we'll still continue to see pressure on the deposit cost. I don't expect at least for the fourth quarter to have any significant increase in our cost of funds primarily because we had this $800 million come on and we have nothing scheduled to come on in the fourth quarter. But I think just reading the journal this week, I mean there are a number of banks, large banks reported that they are continuing to see pressure to raise rates on deposits. And so while we don't have a big campaign out there, there are the customers who have been in lower rate products, who are starting to wake up so to speak. That's what will happen as you have all these rate increased and ask for higher rates. Now we can obviously decline and watch them walk out the door or we can accommodate them and negotiate in some way. So we continue to see pressure on deposit cost, however, we don't expect that it will be as intense as it was in the third quarter.

[Collyn Gilbert:]

Okay. That's helpful. And then just tying that into the loan to deposit ratio, I would imagine, again sort of what you're saying, we could start to see that loan to deposit ratio tick back up in the next couple quarters.

[Sean Burke:]

Yes.

[Collyn Gilbert:]

Okay. And then just another - just a question on the NIM, so I heard you right, I think that your CRE pricing is lower than your multi-family pricing?

[Sean Burke:]

No. When I use the term CRE, I'm inclusive. No our CRE pricing is higher by 8. If you look at our rate, our five-year CRE product is 3.5, and our five-year multi-family is 3 and 3.8.

[Collyn Gilbert:]

Okay. I guess to your initial comment at the beginning with 3.89% on CRE, I thought I heard you say 4% of multi-family for pricing of September, but maybe I heard that wrong.

[Sean Burke:]

That was on origination. That's what we are doing going forward.

[Collyn Gilbert:]

Okay. But I heard that flip-flop, so it's 3.89% on multi and 4% on CRE on the origination yield.

[Sean Burke:]

Actually multi was higher. It was 4% on multi, and 3.89% on CRE.

[Collyn Gilbert:]

Okay. That's what I was getting at, so that's interesting.

[Sean Burke:]

Recognize that the number of deals like for example, the number of deals that were involved were much lower, so you could have the impact of one particular transaction having an effect - having an outsized effect on the yield.

[Collyn Gilbert:]

Got it. Okay. That makes sense. And then Dom, I just want to clarify. I think you said it on the OpEx side, so I think you gave the range of 104 to 106 was that for fourth quarter or that was for first quarter?

[Domenick Cama:]

Fourth quarter.

[Collyn Gilbert:]

Fourth quarter. Okay. And then trickle down from there throughout 2018. Okay, got it. And then just curious, on the credit you guys had indicated on the classified, I think it was classified that it was secured by Walgreens. What was the nature of that credit?

[Domenick Cama:]

Was a good customer.

[Collyn Gilbert:]

Was it like a shopping center where Walgreens was an anchor?

[Domenick Cama:]

Single tenant.

[Collyn Gilbert:]

Okay. But Walgreens was securing it.

[Domenick Cama:]

Correct.

[Collyn Gilbert:]

They are that tenant.

[Domenick Cama:]

They are the tenant, but they're not the owner of the property.

[Collyn Gilbert:]

Got it. Okay. That's all I had. Thank you.

[Sean Burke:]

Thank you.

[Operator:]

The next question will come from Matthew Keating of Barclays. Please go ahead.

[Matthew Keating:]

Thank you. I'd like to follow-up on sort of the expense outlook. Are you actually expecting overall expenses in 2018 to decline vis-a-vis 2017, obviously, I think in the last quarter you mentioned that BSA cost would obviously by elevated in the second half of our following next year, but do you think given that the investments the bank has to make overall that dollar expenses next year could actually fall? Thanks.

[Sean Burke:]

Matt, we have not given any guidance yet for 2018, we are still working through that. One of the issues that you face, obviously when you - while consulting expenses may go down and obviously we have to continue to ensure that our infrastructure risk management staffing is appropriate. So you may see some offsets there, but it's too early for us to say what we expect our expenses for 2018 to be.

[Matthew Keating:]

Fair enough. Thank you.

[Operator:]

And the next question will come from Laurie Hunsicker of Compass Point. Please go ahead.

[Laurie Hunsicker:]

Thanks. Good morning. Just to stay on expenses for a minute here the professional fees is $8.1 million this quarter, how should we be thinking about that just as we roll to 2018? I realize December quarter will still stay elevated?

[Sean Burke:]

They should come down Laurie. The professional fees should come down in 2018 and they will be partially offset by increase in compensation.

[Laurie Hunsicker:]

Right, so maybe $6 million to $7 million quarterly run rate, is the good number?

[Sean Burke:]

Laurie, I'm not comfortable trying to project what that number maybe as a run rate for 2018.

[Laurie Hunsicker:]

Okay.

[Sean Burke:]

So I think we'll have a better idea on the next call.

[Laurie Hunsicker:]

Okay, fair. Okay, and then just to go back to margin, I just want to make sure that I'm looking at this the right way. The 3 to 6 basis points of margin compression that you talk about for the December quarter is off of your core margin. In other words your core margin was 2.78%, you had 9 basis points of prepaid penalties.

[Sean Burke:]

No, I'm talking about our all-in margin.

[Laurie Hunsicker:]

Your all-in margin, okay.

[Sean Burke:]

6 basis points all-in, so we're at 2.7%

[Laurie Hunsicker:]

Right.

[Sean Burke:]

This quarterly margin of 3 basis points to 6 basis points is based off of that Laurie.

[Laurie Hunsicker:]

Okay, okay, right. So your core margin this quarter contracted 4 basis points and when you talk about the prepay penalties obviously, looking back more or like a first or second quarter level that's assuming that round numbers that you're margin will have roughly 5 basis points or so a prepay penalty impact?

[Sean Burke:]

Well, I guess are you suggesting right now - I think you said your core margins 2.78, is that what you quoted verses our…

[Laurie Hunsicker:]

Yes, another word your 2.82 in June, stripping out the prepays, for September you contracted the 2.78 core stripping out all the prepaid penalties because your point prepaid penalties are elevated? And so as we think about December, another word when you're talking about the margin being down 3 to 6 basis points, you're also talking about prepaid penalties running probably closer to that first or second quarter level?

[Kevin Cummings:]

Yes, so I think you have some core margin degradation and then maybe a basis point of prepays to get done.

[Laurie Hunsicker:]

Okay, got it.

[Kevin Cummings:]

If you looking at maybe what's to call it 3 basis points of course margin compression, 1 basis point due to prepays.

[Laurie Hunsicker:]

Got it, okay. That makes sense. Okay and then how should we be thinking about all-in loan growth for next year?

[Sean Burke:]

Obviously you gave the guide in terms of asset growth, how are you thinking about loan growth for next year?

[Sean Burke:]

Yes, I think Kevin talked about the plan to do $1.5 billion, I mean I think our original three year projections call for us to be in that $1.5 billion range for the for 2018.

[Laurie Hunsicker:]

But of what is the loan of $1.5 billion?

[Sean Burke:]

That's a loan growth.

[Laurie Hunsicker:]

That's a loan growth, great. Okay. And then just going back the $48 million that you cared was there a recovery on that?

[Sean Burke:]

Well, we sold it.

[Kevin Cummings:]

There is no charge-off on it.

[Laurie Hunsicker:]

Right, I know there was no charge-off, but was there - okay there was no recovery, okay. So your $1.7 million was…?

[Kevin Cummings:]

Not related to that.

[Laurie Hunsicker:]

Not related to that. Got it, okay. And then go back to Mark's question on loan loss prevention that's we're thinking about it your loan growth comes back, I mean if you're running $4 million to $5 million a quarter, that's not out of the realm?

[Kevin Cummings:]

It's hard to say, it just depends on the types of assets in the types of loans coming in. We may be doing more residential lending. So it's just hard to say and a lot has to do with the net charge-off and I'll look back period as we calculate the reserves too. So as we go on period of time, you get further away from the 2012 period, 2010, 2012 period, when they were much larger charge than we have in more recent period. So if the calculation is a lot of attributes that get into the calculation and it is without - you saw this quarter was down and net charge-off being reduced. We have more opportunity hopefully to stay the course of where we are today.

[Laurie Hunsicker:]

Okay, great. And then just two last questions to [indiscernible], how are you thinking about that for next year?

[Sean Burke:]

They've slowed significantly. I think we probably have two or three branches scheduled to open in 2018.

[Laurie Hunsicker:]

Okay. And then last one Dom just to go back to your comments that you made to Austin on M&A? Or you said you would be respectful of tangible book I think you said you know we're not going to have significant to listen to tangible book and you're going to be careful on our back what are your outside parameters in terms of how much you would tangible book by to your breakpoint or you won't cross it?

[Domenick Cama:]

Laurie, I've been consistent in saying that depending on the deal my breakpoint really comes in the form of the earn back. Right, I think I know you and I have talked about this a number of times. But it's I don't want to say that you know dilution is not something that we look at but certainly in our mind it's important to show that whatever dilution we incur we can earn it back within a timeframe that's acceptable to us and to our investors and not the outside and I think I've also said publicly that that number is around five years.

[Kevin Cummings:]

That just dilution is the accretion on EPS too. So you have to look at two.

[Laurie Hunsicker:]

Sure and on tangible book dilution now you won't put a ceiling on that?

[Kevin Cummings:]

I think you have that in the past and we said no it's a ratio of the calculation.

[Laurie Hunsicker:]

Okay. Thank you.

[Kevin Cummings:]

Thank you.

[Operator:]

The next question will come from Bill Keith of Macquarie Capital. Please go ahead.

[Bill Keith:]

Hey, guys, good morning.

[Kevin Cummings:]

Good morning, Bill.

[Bill Keith:]

Hey, congratulations on a great quarter. Hey Dom, I know before you touched upon the issue of tax reform. But it appears as if it could be a real significant tailwind for the banks I like your comments on that. As well as if you could offer any color on the write-down of what your deferred tax asset would be assuming we get somewhere around the 20% to 25% tax rate by the Trump administration. And then thirdly, how would tax reform influences your thinking potential M&A, especially with the lower tax rate the significant value enhancements that cost efficiencies would offer the bank? Thank you.

[Domenick Cama:]

When Trump got elected and we saw our stock price appreciate the way I mean the whole marketed. Obviously a lot of exuberance if you will over the regulatory situation getting better and attack situation getting better. I mean you know we are approaching 12 months of you know President Trump being in office and I think we've been consistent in saying, “hey, it's a wait and see attitude.” And so yes, while I agree that did the tax situation has seemed to get some legs here and looks like there's a greater probability that it's going to happen. We don't sit around the room and say okay. We're going to improve we're going to increase our M&A. We'll look at a particular institution because the tax tuition got better. We have other things that we look at strategically and it needs to make sense strategically first and if it does that then we'll worry about the tax situation later. But at this point for us to try to estimate or forecasts, what actions we're going to take because tax reform kicks in. We just don't run the business that way.

[Sean Burke:]

And just I think last week we met with our tax advisors and look at different ways to minimize the impact if rates do go down with respect to deferred tax assets. There are certain strategies that we can do, accelerate payment of expenses or things like that that will minimize that impact over a period of time. The big item is the allowance, which we can't do anything with in that regard and our allowances basically larger than and most of our peers as far as with the mix of loans that we have. So I think we're looking at it. We're prepared to do some things to minimize the impact of the taxable change on the deferred tax asset. And then in addition, if things do remain the same looking at different tax strategies to lower our effective rate by looking at maybe some housing credits and things like that.

[Kevin Cummings:]

But Bill I think you are - it would be a significant - it could be a significant tailwind for us. We just don't want to bank on it, but you are absolutely right. It would be a big, big win for us.

[Bill Keith:]

Great, guys. Thanks so much for the insight.

[Kevin Cummings:]

Thanks.

[Operator:]

And ladies and gentlemen that will conclude our question-and-answer session. I would like to hand the conference back over to Kevin Cummings for his final remarks.

[Kevin Cummings:]

Thank you Denise and I want to thank everyone for participating on the call. The quarter was strong. It is good momentum at the company and I wish you all a good Thanksgiving and I will be talking to you soon. Thank you very much.

[Operator:]

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.