Investors Bancorp, Inc.
Q4 2016 Earnings Call Transcript

Published: 27 Jan 2017

[Operator:]

Good day, and welcome to the Investors Bancorp Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that 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 its Safe Harbor disclosure and refers you to that statement. That document is incorporated into this presentation. For a more complete discussion of 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. Please go ahead, sir.

[Kevin Cummings:]

Thank you Andrew, and good morning and welcome to the 2016 fourth quarter Investors Bancorp earnings call. The company and the bank continue to execute on its strategic business plan and posted strong results for both the fourth quarter and for the year ended December 31, 2016. We finished the year with net income of $192.1 million with $0.64 compared to $181 million or $0.55 a share in 2015. Net income in 2016 was positively impacted by the adoption of new accounting principle relating to the tax benefit of stock compensation which previously had been recorded through the equity statement versus currently the income statement in 2016. As outlined on Page 17 of our press release core earnings for the year increased to $183 million or $0.61 per share which represents a 17.3% increase in EPS for the year. On a quarterly basis core earnings were $51.7 million or $0.18 per share versus $43.6 million or $0.14 a share which represents 28.6% increase in EPS for the quarter. It was a very strong quarter for the bank and the operating results for the year and the quarter reflect the execution of our business plan and a positive impact of the stock buyers buybacks on EPS. The company posted strong loan growth for the quarter and earnings were positively impacted by prepayment fees as borrowers decided to accelerate transactions in the fourth quarter in anticipation of potential interest rate movements post election. We continue to diversify our balance sheet leverage our capital and make investments in our risk management infrastructure. Through our organic growth stock buybacks and dividends we have leveraged our capital in a prudent manner. Our tangible capital ratio at year end is 13.1% down from 19.7% in June, 2014 and 15.4% as of 12/31/15. Since the first quarter of 2014 just before our second step we have grown $6.8 billion in assets without an acquisition. Our loan growth was strong for the quarter at $501 million which follows a good third quarter of $660 million in growth. This organic growth without an acquisition has allowed us to continue to post solid earnings while continuing to manage the bank by making investments in our retail franchise, risk management structure and the technology platform at the bank. At a board meeting on Tuesday we approved our cash dividend of $0.08 per share payable in November which equates to a payout ratio of 44% for the fourth quarter of 2016. As discussed many times on these calls we plan to continue to use the four key levers to maximize our return on equity for our shareholders. That is organic growth which diversifies our credit risk and revenue streams, stock buybacks, dividends and acquisitions. We are certainly executing on four of these strategies at the present time. With respect to acquisitions as many of you know this week the company and the Bank of Princeton neutrally agreed to terminate our merger agreement which was announced in May 2016. At this time it is in the best interest to both parties to do this as it removes the uncertainty of the transaction pending regulatory approval. As a result of our informal agreement with the regulators relating our BSA procedures, we continue to make progress in this area but it was not far enough long to gain approval of the transaction in the first quarter of this year. Our BSA/AML continues to work diligently enhancing its procedures and its technology. Improving this risk management infrastructure is a priority of the bank as we continue to grow from a community to a leading top 50 bank in the nation. Our success, our growth in assets and earnings have resulted in a new opportunity for us to improve and invest in its risk management structure in our systems that were not needed as a community bank half our size. We will continue to manage this situation while growing the company in a prudent manner as demonstrated by our results post-second step that is two years of record earnings and $4.4 billion in balance sheet growth in 2015 and 2016. As mentioned earlier, our loan growth for the quarter was strong and more diversified than previous quarter as multifamily was only $99 million of the growth versus the other commercial areas accounting for $470 million in growth. We continue to monitor this multifamily exposure in light of our market conditions and regulatory concerns. Our asset quality remains very strong as net charge-offs totaled $9.9 million for the year ended 12/31/16 compared to $7.8 million in 2015, that’s about an average of $9 million per year. For the fourth quarter we had a net recovery of $73,000 compared to net charge-offs of $1.8 million in the third quarter of 2016 and $1.8 million in the fourth quarter of 2015. Our non-accrual loans decreased for the quarter from $97 million to $94 million and now stand at 50 basis points to total loans. 85% of these loans are residential loans with an average balance of $167,000. We continue to be conservative in our evaluation of this residential portfolio as we move them through the extended legal process that we see here in New Jersey to foreclose on these loans. On the commercial side, our non-accrual loans totaled $14.4 million which consist of 34 loans for an average exposure of $425,000. There are no significant exposures in this pool of loans and the commercial portfolio continues to perform well. As mentioned during our third quarter call there are five loans to one borrower for approximately $31 million which are now 60 days delinquent. These loans are well collateralized with national single tenant occupants with long-term leases and have a LTV of less than 70%. Backing out that exposure that individual exposure our 30-day and 60-day delinquencies for commercial loans totaled approximately $15 million or 11 basis points. We finished the year with an allowance for loan losses as a percentage of total loans of 1.21% and a coverage ratio to non-accrual loans of 242%. With respect to our retail branch expansion we opened three branches in the fourth quarter and 11 for the year. Deposits increased by $1.2 billion or 8.7% for the year and over the last two years, our deposits have increased from $12.2 billion to over $15 billion and our core deposits now represent 81% of total deposits at year end. Our loan to deposit ratio increased slightly during the quarter to 123% and we continue to monitor this ratio as we managed the growth of our balance sheet. Our cost of deposits were 63 basis points for the quarter versus 65 basis points in the third quarter of 2016 and 67 basis points in the fourth quarter of last year. This allowed our net interest margin to improve to 307 versus 3% in the third quarter and 305 in the fourth quarter of 2015. It was strong operating results for the year and the quarter and now I would like to turn the call over to our CFO, Sean Burke who will give you some additional commentary on our operating results.

[Sean Burke:]

Like to briefly review some additional financial highlights for the quarter. Our loan portfolio grew $500 million quarter-over-quarter to $18.8 billion for the year ended 2016 our loan portfolio grew $1.9 billion which represents 12% increase year-over-year. Our loan pipeline stood at a robust $2.5 billion at December 31, which is consistent with the prior quarter. Deposits grew $329 million to $14.1 billion with growth being driven by non-interest checking and Money Market products. Non-interest bearing deposits now represent approximately 15% of total deposits. Asset quality metrics remain strong non-accruals total loans were 50 basis points at December down from 53 basis points last quarter. Our allowance to total loan ratio was 1.21% at quarter end. Net income for the quarter was $52.5 million or $0.18 a share excluding the impact of the ASU adoption as well as non-core expenses. Fourth quarter EPS was still $0.18 per share compared to $0.15 per share in the third quarter. Net interest income rose 6% from the prior quarter to $169 million driven by strong loan growth and margin expansion of 7 basis points. Prepayment penalty income totaled $7.4 million for the quarter versus $4 million in the third quarter. Ex-prepayment penalty fees margin was stable quarter-over-quarter. Provision for loan loss totaled $4.8 million, a slight decrease from the third quarter. Non-interest income totaled $8.5 million which was consistent with our previous quarter. Non-interest expenses totaled $89 million a decrease of $2.4 million from the third quarter included in that total were non-core expenses related to the Bank of Princeton merger termination and the accelerated vesting of equity awards due to the death of a director. Declining expenses for the quarter was driven by lower incentive compensation in the freezing of our pension and SERP plans. Our tax rate ex to ASU adoption was 39.7% for the quarter going forward we expect our tax rate to be in the 39% area. Lastly, we repurchased 2.2 million shares during the quarter at an average cost of $12.05 per share. Now I would like to turn it back over to Kevin for some concluding remarks.

[Kevin Cummings:]

As we wrap up the call today, we want to let you know that the numbers and the results of the bank speak for themselves for the year. Asset growth 11%, loan growth over 11%, deposit growth of 9%, EPS from core earnings growth of 28%, quarterly dividend increase from $0.06 to $0.08 on annual basis on quarter-to-quarter and share buybacks of 31 million shares for $363 million. It was a very successful year but a very challenging year for the bank. Our regulatory issue with BSA is a setback, but we’re focused on it and allocating the time and resources to resolve it. We are confident with our business plan and we believe that we have the strategy continue to bring strong returns to our shareholders. We are building and investing in our people and our infrastructure to continue to expand and grow our franchise in the New York, New Jersey market. We are partnering with world class organizations as evidenced by our recent partnerships with the New Jersey Devils. We are executing this initiative while building a fortress balance sheet with strong reserves and a strong capital position. It took us 8.5 years to leverage the initial IPO proceeds in October of 2005 down to a capital ratio or capital base of less than 8%. Today with a tangible capital ratio of 13.1% we are halfway there after only 2.5 years since our second step in 2014. Our strategy and execution have a proven track record. It is built on singles and doubles, patience and perseverance. This is built on the core values of the company. Character, commitment, cooperation and community. We finished 2016 with strong results and with great momentum going into 2017. Domenick and I have attended several retail regional meetings and it is great energy in the company. We operate in the best market in the world. And we are leading regional bank in that market. We have a proven and sustained track record of earnings growth, franchise expansion and strong credit quality and we are very pleased by not satisfied with the results. We will continue to maintain and increase the value and the franchise of our organization in our markets. I’d like to thank you for your continued interest and investment in the company and now I would like to open up the call for questions.

[Operator:]

[Operator Instructions] the first question comes from Jared Shaw of Wells Fargo. Please go ahead.

[Jared Shaw:]

Can you spend a little talking about your thoughts on commercial real estate growth and multifamily growth specifically? In your markets obviously there is competitive dynamics at play here with some of the bigger historical competitors have slowed down and pulled back and you still have it, it seems like capacity under the commercial real estate concentration to still see growth there. So I guess if you could spend a little time talking about what your thoughts are on it. And then also whether you’re seeing improvement in pricing in terms as well.

[Domenick Cama:]

Good morning, Jared. It’s Domenick. It’s interesting the pipeline has moved back to where it was you heard Sean talk about the pipeline being where it was at this point last quarter. But during the quarter it had fallen by about 25%. It seemed in December that production had picked up substantially and I think that was a probably product of interest rates going up quickly. We also we bought a small package of CRE loans from the market. Our pipeline is back where it is now and surprisingly we see multifamily continuing to be the dominant asset class in that pipeline. The fact is that, we have benefited from some big players in the market pulling back substantially and truthfully that’s what I believe has helped to increase the pipeline. Having said that, we continue to focus on diversifying loan portfolio off that $2.3 billion to $2.5 billion in pipeline approximately $600 million of that is in C&I credit and so while multifamily continues to exist out there, we remain focused on our C&I credits. In terms of pricing just yesterday we in fact raised our rates on more time. We’re looking at five-year multifamily rates being in the 3% and 3.25% range which is substantially higher than where it was at this time last year. Also I believe as a result of the pullback in the market we want to try to take advantage of this higher rate environment and so we’ve moved rates up twice over the last 60 days. So yes, there continues to be activity in the multifamily market. We remained focused on our diversification strategy and rates are higher than they’ve been over the last six months.

[Kevin Cummings:]

Jared also if you look at the fourth quarter, the multifamily was $100 million and actually the CRE and what we call business lending with owner occupied both exceeded that number. Again it’s part of our strategy relationship bringing the deposits with the loan and we do that, we have a team working on both the multifamily and the CRE and our C&I guys, our business guys have done a great job in growing business deposits here at the bank. So it’s certainly an emphasis, we don’t want to be one-trick pony relying on the multifamily which is broker driven. We want to be focused on all aspects, diversify our revenue stream and move forward accordingly.

[Jared Shaw:]

So when you look at combined CRE including multifamily. It seems like there’s still some capacity or some room to go before you hit that 300% threshold given you capital base, is that - would be comfortable?

[Domenick Cama:]

Jared, we’re over that. I mean our concentration is about 375%, 370%. We are over it now.

[Jared Shaw:]

Okay, sorry with that. I keep looking at wrong number. Shifting if you can just little bit to the M&A side obviously Bank of Princeton was terminated but as we look beyond the BSA/AML investments can you give us an update on your thoughts on how you see M&A following into the capital management structure. Obviously you’d spoken in the past about some other deals, some bigger deals that you looked at in the past. Have your thoughts changed over what ultimately you could see doing on the M&A side?

[Domenick Cama:]

No, I think Jared our strategy remains the same in terms of looking at the full leverage that Kevin described earlier M&A obviously being one of them. However in 2017 giving where we are on this BSA situation and historically when you consider the length of time that it’s taken institutions to get out of BSA order. We’re not optimistic about being able to do M&A I think in 2017. Having said that, we also believe that we continue to make progress and we’re working hard to get out of this BSA issue and so eventually will be back in the M&A game. Capital levels are still relatively high at about 13% and when you think about the future certainly we consider that M&A will be an important part of the franchise.

[Kevin Cummings:]

And if you look at the metrics and the map in the Princeton deal that was a great numbers. It worked well for us, was at right size, the right market geography. If you look at our eight deals that we did prior to the second step our strategy is singles and doubles and again I said it many times on these calls we were very cognizant of tangible book value, dilution too. But also growing the franchise and improving the franchise. We need to - one of the reasons for early we had until March 31 to terminate the transaction but we looked at it and we knew where we were and we decided to move forward. Take the uncertainty out of the game and focus on the things that are at hand and priority of the organization at this point in time.

[Jared Shaw:]

Thanks and my final question just looking at the buyback this quarter number of shares were little lower, you obviously benefited from a higher share price too. As we look through 2017 with the deal terminated should we expect to see the buyback increasing as a percentage of or increasing as number of shares compared to fourth quarter.

[Domenick Cama:]

I think Jared, we’re still in a place of uncertainty in terms of valuation. I mean when you think about the fact that truthfully the only thing that’s increased not only our valuation but others is the increased optimism of the Trump election. It’s still concerns us that we’re trading at a different levels than we were prior to the election and so we’re still, I’m going to say uncertain about where buybacks will go for the remainder of this year.

[Kevin Cummings:]

I’d say Jared, we’re evaluating that and along with dividends and the other tools that are available to us.

[Jared Shaw:]

Thank you.

[Operator:]

The next question comes from Mark Fitzgibbon of Sandler. Please go ahead.

[Mark Fitzgibbon:]

I wondered if you can share with us how much the freezing of Defined Benefit Plan and the SERP will save, on a quarterly basis.

[Sean Burke:]

Quarterly basis, closed to $1 million on a quarterly basis. Mark.

[Mark Fitzgibbon:]

Okay, great and then secondly I don’t think you had shared with us yet. But could you tell us what the loan pipeline sizes are and maybe the average yield bonus [ph].

[Domenick Cama:]

The pipelines are $1.5 billion in CRE, $600 million in C&I and about $350 million in resi. And in terms of the yields I can tell you what we’ve been putting loans on at on a monthly over the last month. Those yields on the CRE side about 360, on the C&I side somewhere around 450 and in the resi side about 330.

[Mark Fitzgibbon:]

Okay, great and then as I relates to headcount. It looks like your headcount was up about 50 people in the fourth quarter. Are most of those people branch folks? And do you think that headcount will sort of flatten out in coming quarters?

[Domenick Cama:]

No most of those heads are in our risk management area including BSA and the branch folks actually have been trending downward to some degree and just per branch. We expect to see that continue to increase in 2017 and again primarily in the risk management area.

[Mark Fitzgibbon:]

Thank you.

[Operator:]

The next question comes from Dave Rochester of Deutsche Bank. Please go ahead.

[Dave Rochester:]

Back on the expense side, sorry if I missed this. In what inning do you guys think you are in a BSA ramp up process at this point? Just given the comments on M&A it sounded like you might be in the middle innings of that, but was just curious. What are your thoughts on that?

[Sean Burke:]

This is Sean, Dave. It feels like we’re in middle innings but that said, we do look at how long it’s taken others to get out of these types of issues and to some degree it’s hard to really pinpoint exactly when that is. So you could correct an issue but you know, you have to also focus on the sustainability of what you fix, so that’s out of our control to some degree. So I would love to pinpoint a number and we would love to know that. What we do know is that, we continue to make progress and it’s a number one focus and we are making significant progress and we’re hopeful that we’re in the middle innings of that endeavor.

[Dave Rochester:]

How much more spending do you guys think you need to do on that front? Just in terms of a quarterly run rate increase or anyway to frame that?

[Sean Burke:]

Yes, I mean, we’ve already got a lot of that in our run rate right now, as Mark pointed out that as you look at the headcount and how it’s gone up through the year. A significant portion of that is related to this issue. There’s still more to go here, it’s hard for us to necessarily pinpoint exactly how we come in or how much there is there, but what I can say is as we think about expense guidance for 2017. We feel comfortable saying that our expense growth rate year-over-year is in the let’s call the mid, the high single digits range.

[Dave Rochester:]

So mid-to-high singles off of reported for 2016.

[Sean Burke:]

For 2016, correct.

[Domenick Cama:]

And we also have some other cost that are going to be coming through not just personal cost, but consulting fees in relation to the this model validation of the BSA what they call CRM [ph] and also the look back that we have to do too, that will be probably mainly in 2017.

[Dave Rochester:]

Got you, appreciate that. And I was just wondering what prompted you guys to freeze the benefit plans? Was it the BSA issue? And was it self-imposed?

[Kevin Cummings:]

Yes it was self-imposed. The Defined Benefit Plans are a benefit truthfully you don’t see it many companies anymore when we looked at the increased expenses that we were incurring as a result of the risk management infrastructure build, we looked around the company to see where we could save some money and it seemed that was pretty much low hanging fruit, given the fact that we continue to provide competitive benefits to our employees in the form of competitive 401k and a competitive ESOP.

[Dave Rochester:]

Okay, great and just one last one. Sorry go ahead.

[Sean Burke:]

I was just going to comment Dave, I know it sounded little bit wishy-washy on the point on the BSA expenses. But hopefully the guidance for the full year is somewhat helpful there and if we have any more color obviously we’ll share that. But as Domenick pointed out we’re committed to improving our operating leverage and we’re mindful of that, we always have been and we will continue to be. So to the extent that we do have cost, they’re going in excess of what we expect we’re going to try to find ways to offset those.

[Dave Rochester:]

Sounds good, that’s helpful. I know this stuff is hard to predict. Go ahead.

[Kevin Cummings:]

That was our motivation with respect to Defined Benefit Plan and the executive SERP plan. We’re here managing the company and we’re always very careful, we review our expenses like it’s our own money here and we’re very mindful of creating shareholder value.

[Dave Rochester:]

Great. Sounds good. Just one last one on the competitive backdrop on the deposit side. Was wondering if you see any upward re-pricing pressure from the competition or if it’s been fairly benign post hike [ph]?

[Domenick Cama:]

No, there’s been some pressure from some of the larger banks in our area. Some unadvertised promotions and so we’re feeling a little bit pressure there. Fortunately that pressure is being offset by the maturity of our high-rate CD that promotion that we ran in 2015. So you can see that come through in the cost of deposits.

[Dave Rochester:]

Do you think it’s possible to get some NIM expansion in the first quarter? In that case?

[Domenick Cama:]

I would be going out on a limb to say that there would be NIM expansion just given the environment I think the best I could say, is probably flat.

[Dave Rochester:]

Yes. Okay. Great thanks guys appreciate it.

[Operator:]

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

[Collyn Gilbert:]

Just if you could talk a little bit about your outlook for overall loan growth as we move into 2017? I know you talked about the pipeline but it seems as if you guys have kind of thought of growth coming in at that $1.5 billion to $2 billion in net originations for the year but how are you seeing that that trend as we look out in 2017 given all the dynamics have been going on?

[Domenick Cama:]

It’s interesting. As you know, we had adjusted downward our loan growth projections for 2016 at about $1.5 billion and then obviously we blew that out of the water at $1.9 billion in growth for the year. I’m going to say that, in terms of our projections in 2017 we’re going to remain conservative and project. We’re projecting a $1.4 billion in loan production for overall growth in 2017. Having said that truthfully the December month surprised us somewhat, in that we had more growth than we expected and I think I talk a little bit about the dynamics why earlier in the Q&A. So at this point, Collyn we’re going to stick our conservative outlook at $1.4 billion. Truthfully we don’t know where the market will go at this point, we don’t know when some of the larger competitors will come back in and be more competitive and so I think for all intents and purposes staying with our projections of $1.4 billion is probably will be the answer to that question.

[Collyn Gilbert:]

Okay. That’s helpful. And how about on the deposit side? How do you see the funding vehicles shaking out for next year or for this year?

[Domenick Cama:]

The deposit continues to be a challenge, our own projections call for deposits to grow, just shy of $1 billion about $900 million and truthfully, that’s hitting on all cylinders. Deposits as you know continue to be a challenge not only for investors bank but for most institutions here in the North East given what loan production has been like. And so, that remains a big question mark, but we think we’re pretty comfortable that achieving about $900 million growth level is achievable.

[Sean Burke:]

Go on, go ahead.

[Collyn Gilbert:]

Go ahead, Sean. No go ahead.

[Sean Burke:]

I was just going, to add to Domenick’s comment on the deposit growth as we thought about how we budget for the year. We’re focused on improving the quality of that deposit as well. So when we quote the figures we really are focused on improving the mix of that deposit and hopefully that will drive the deposit cost lower, you see that in the fourth quarter numbers. Whether there is additional pressure up there or whether we get rate increases and remains to be seen, but it could put pressure on some of those deposit costs. But we’re focused on not only the growth, but the quality of the growth.

[Collyn Gilbert:]

Okay. That’s very helpful. And then just the last quick question on mortgage banking, what is your strategy there? And how do see that business line trending this year?

[Domenick Cama:]

Well mortgage banking obviously is moves along with the rate cycles. Right now what we see is that reduced levels of loans being sold in to the secondary market naturally, more loans coming onto our own balance sheet. However, we had a very good year in 2016 in terms of what the mortgage company produced for us, but we have scale down our expectations for what revenue can come from there just given the projection that rates will be higher in 2017.

[Collyn Gilbert:]

Okay, that’s helpful. I’ll leave it there. Thanks guys.

[Operator:]

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

[Matthew Breese:]

I appreciate the margin outlook for the first quarter, but I was hoping for a little bit more color related to full year projections with a couple of rate hikes given that on paper your liability sensitive but reality, things can be a little different, so I was looking for a little color there.

[Sean Burke:]

Sure Matt. For the full year the guidance that we can provide for margin is 2.95 range for the full year and that is taking into account two rate hikes throughout the year one in June and one towards the tail end of the year.

[Matthew Breese:]

Okay. And is there prepayment penalty income included in that or is that the core margin?

[Sean Burke:]

That’s the all in margin and we are reflecting a decline in prepayment penalty income, so that is in, that’s part of a number that I’m giving you is an all in number.

[Matthew Breese:]

Understood. Okay. And then returning to the capital management discussion, I know you are weighing the valuation and the buyback, but in terms of overall payout through dividends and buybacks, what would you say that percentage will be for the full year?

[Sean Burke:]

On dividend or on both?

[Matthew Breese:]

Combined. If you were to think of combined [indiscernible] dividends and what would you?

[Sean Burke:]

It’s hard to say because we don’t know what the share repurchases are at this point, but our dividend alone is about 50% off that 45%, 50%. So it really remains to be seen where the market goes. I think we’ll have a comfort level and we’ll be able to give you a better answer over the next couple of months as this administration sort of settles in. we understand the priorities and where it’s going and how it may impact a sector, what influence, how we’re thinking about share repurchase activity.

[Matthew Breese:]

Okay. And then back to the expense discussion, I appreciate the outlook for the year, but how would you expect expenses to trend throughout the year and will there be a bump up in the first quarter to get you closer to that run rate of potentially high single-digit growth?

[Sean Burke:]

There could be part of not wanting to provide guidance is just because there’s a little bit of variability as you deal with the BSA issue, you really don’t know necessarily when they could come in. we would expect if they’re coming in they would come towards the beginning of the year and so yes we do expect that there could be a bump in the first quarter related to that. Also we have our normal merit increases that kick in at the beginning of the year as well so there will be a bump in that first quarter.

[Kevin Cummings:]

And looking at fourth quarter expense run rate, we had some reserve or our incentive comp number was low based to estimate, so that reduced the run rate of the expense in the fourth quarter and then the impact of the Defined Benefit Plan and the SERP plan. We really picked up the savings there in the fourth quarter, so there will be some increases in the first quarter just because of the impact on those items in the fourth quarter.

[Domenick Cama:]

And we’re using more consultants in the first quarter and so our expectation is that, as we go through the hiring process that those hires will come in, they’ll be trained and that will reduce the reliance on the consultants going through the year.

[Matthew Breese:]

Got it. That’s all I had. Thank you very much.

[Operator:]

Your next question comes from Laurie Hunsicker of Compass Point. Please go ahead.

[Laurie Hunsicker:]

Actually wanted to go back to your question that Matt was asking for margin and Sean maybe you could help me with this. So if you look at your margin for this quarter was 3.07. If I shook out the prepay income I’m down to 2.94 and you are directing round numbers 2.95 with your target for this coming year. With two rate hikes and I assume very nominal prepay income so you’re essentially looking to hold your margin flat in the face of two rate hikes even though you’re liability sensitive?

[Sean Burke:]

No, Laurie you’ve got probably when we’re talking about the decline, the guidance I gave 2.95 do you think where we ended the year for the full year 3 or 4 and there was about 10 basis points different there and what I would say is about half of that is coming from prepay to clients in that forecast and probably half related to interest rate movements.

[Laurie Hunsicker:]

Okay. But if I just think about just even this most recent quarter your core margin or let me ask at a different way. Your 2.95 that you are projecting, how many basis points of prepay income roughly are you estimating will be in that number?

[Sean Burke:]

About 3 to 4.

[Laurie Hunsicker:]

3 to 4, okay. Okay. That’s helpful. And then Kevin, just to go back to the question of M&A as you stated your strategy remains the same. Historically you’ve commented that you could do a fairly larger size acquisition and obviously this is when you get on the flipside BSA/AML. Are you still thinking about that strategy the same way to in terms of potential size acquisition?

[Kevin Cummings:]

I think Laurie if you look at our historical performance I think that’s a good indicator of our M&A strategy. We look at opportunities in the marketplace to enhance franchise value and the size of the transactions certainly have some impact on our decision making, but you know the commentary and discussion regarding Astoria [ph] is really old news and it’s really to be continuing to talk about it not really conducive to anything of value to where we sit here today. So as we move forward we’re focused on resolving our BSA issues and look forward to even being active in the market as we get hopefully to the end of this year or in early first quarter next year as we get these BSA issues behind us. It’s - you fight one battle at a time, patience and perseverance and we’ll win the day and those you’ll have to look at our history and what we’ve done and how we’ve executed here. In fact, if you look at our loan growth last two quarters, its $1 billion over $1 billion in loan growth and we’re executing on our plan here and we’ll talk to the things that we do not that we might have done.

[Laurie Hunsicker:]

Okay. So I mean, along those same lines since you brought it up, with respect to a Astoria [ph]. Astoria [ph] is back on the market and I realize you’re out of the market at the moment. But potentially would that be something you’d be interested in looking at again? I mean, your stock prices substantially higher than the 12.66 when you bid on them in October 2015.

[Domenick Cama:]

Hi, Laurie its Domenick. We are out of the market. We’re out of the M&A market for the time being so trying to speculate on whether we’re interested or not interested in Astoria [ph] as Kevin said doesn’t provide any value. At this point, we’re out of the market and we’re not interested in any transactions at this point.

[Laurie Hunsicker:]

Okay fair. So let me ask you this, when is your next safety and soundness exam scheduled for?

[Domenick Cama:]

We are on a continuous exam cycle. So we have because of our size we have resident examiners here. So there are exams that are done every month here. So we don’t have scheduled where examiners will leave the building and then come back for a month to do exam and then give us the results of that exam. It’s a continuous cycle. So we’re always in the know, about where we stand from a regulatory perspective. And the last week I met twice with regulators on site here, once in Iselin and here in Short Hills and had two conversations on the phone with the Regional Office, The FTIC and the Federal Reserve.

[Laurie Hunsicker:]

Great, thanks. I’ll leave it there.

[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:]

Thank you, Andrew. I would like to thank you all for participating on the call today. 2016 was a very successful year for the company. We are moving forward in 2017 with great momentum and a dedication to the highest quality service and leadership to our customers and to our communities. I would like to thank all our employees, all that they do here and for their commitment to our core values and making investors, a special place to work. If we take care of our employees and our customers. You our shareholders and investors will continue to be well served. Thank you and enjoy Super Bowl next week and have a great week. Appreciate your time today. Thank you very much.

[Operator:]

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