Investors Bancorp, Inc.
Q4 2015 Earnings Call Transcript

Published: 29 Jan 2016

[Operator:]

Good morning and welcome to the ISBC Fourth 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 will 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 the 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 forecasted in these forward-looking statements. In last night’s press release, the company has included the 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 section entitled Risk Factors, Management Discussion and Analysis of Financial Conditions and the Results of Operations set forth in Investors Bancorp’s filings with the SEC. And now, I’d like to turn the call over to Kevin Cummings, President and CEO of Investors Bancorp.

[Kevin Cummings:]

Good morning and thank you, Amy, for that introduction. The company and Investors Bank had a strong finish to 2015, a record year for earnings. We finished the year with net income of $181.5 million versus net income of $137.7 million in 2014, which equates to an increase of 38% for the year. On the EPS basis, earnings in 2015 were $0.55 versus $0.38 in the previous year. As outlined on Page 17 of our earnings release, 2014 and 2015 had some non-core revenue in expense items related to our second step conversion acquisitions, and state and local tax benefits. Taking these items into account, core earnings for 2015 was approximately – was $173.4 million versus $148.6 million in 2014, an increase of 17% for the year. On a diluted earnings per share basis, earnings were up 21% from $0.43 in 2014 to $0.52 in 2015. For the quarter, core earnings in 2015 were $43.6 million or $0.14 per share, versus $40.1 million in the fourth quarter of 2014 and $0.12. Our increase in EPS is 18% for the quarter and reflects the benefits of our stock repurchase program, which reduced weighted average shares outstanding by approximately 26 million shares for the quarter ended December 2015. I’m happy to report that we increased our dividend this quarter from $0.05 to $0.06, as we believe that this is another tool to use in our capital management program. As indicated on many previous calls, we use a scorecard approach to our capital management, which includes stock buybacks to purchase 31.6 million shares in 2015. Dividend, we’ve paid $0.25 per share in 2015. Organic growth, our total assets grew a 11.3% for the year. And smart acquisitions that do not hurt tangible book value and have a reasonable earn back period in that three-year to five-year period. Our tangible capital ratio went from 18.6% at the end of last year to 15.43% at the end of this year. We continue to manage the company in a prudent manner and make investments in our retail branch network, our lending businesses, technology and most importantly our people. In the fourth quarter, we announced the recent hiring of Brian Doran as our new General Counsel. Brian joins us with many years of banking experience on both the legal and business side. In addition, we hired a new Chief Risk Officer, Philippa Girling, who comes to us from a national bank, it’s many years with the Wall Street firm here in the U.S. and the UK. Having made a significant investment in our technology platform in 2015 with our core conversion, we will also continue to make investments in our branch network. In the fourth quarter, we opened three branches which have accumulated almost $75 million in deposits and a blended cost of 37 basis points. In addition, we have 10 to 14 branches scheduled for opening in 2016 depending on approval and instruction progress with nine plans for the New York franchise and five in New Jersey. For the quarter, our net interest margin went from 3.14% in the third quarter to 3.05% for the quarter ended December 31. Prepayment fees were $4.5 million for the fourth quarter compared to $6.4 million in the third quarter. Removing the impact of those prepayment penalties, our decline would have been approximately four basis points linked quarter. We are pleased with the continued transformation of our balance sheet, as commercial loans continue to grow and our asset quality remains strong. Commercial loans increased $566 million for the quarter and $2.5 billion for the year or 5.2% and 27.7% respectively. Our business lending groups, which includes loans to owner-occupied commercial real estate, totaled $1.6 billion and has $538 million in growth for 2015. Without the owner-occupied of loans we’ve had a milestone of $1 billion for pure C&I loans finishing with $1.04 billion at December 31. Multi-family and CRE had a strong year, growing $1.2 billion and $682 million for the year, which equates to 24% and 22% growth respectively. Commercial loans now comprised 67% of total loans. We look at this business, as the continued diversification and we plan on continuing to diversify this portfolio, and want to build on our relationship business platform. We believe the strategic direction will build franchise value for our company. On the credit front, we saw improvement in our non-performing loans and NPAs in the quarter, due to the sale of loan package of residential loans for $20 million, which incurred a $4.5 million charge-off. Residential and consumer loans make up almost 80% of our non-accrual loans at year end. And as you know, they take a long time to resolve due to the foreclosure and legal process here in New Jersey. The average non-accrual loan in this portfolio is approximately $182,000 and posses a low risk to our company. On the commercial side, our credit remains strong as non-accrual loans totaled $24.3 billion – $24.3 million with 21 basis points. In early January, one relationship for approximately $10.2 million, which was flat, part of an accruing TDR was paid off in full and reduced our TDRs from $22.5 million to $12.3 million. This transaction plus another consumer loan secured by cash surrender value of life insurance for $1.9 million was brought current in January, and would have brought our total non-performing loans down to 82 basis points – down from 82 basis points to 74 basis points – 74 basis points on a pro forma basis. One category that shows – in the multi-family space, the one category that shows any kind of delinquencies in the 30 to 60 day category is in the multi-family area, which has five loans for $13.7 million in the 30 to 60 day category. As of today, all five of loans are current. So, on the commercial side we have very little pipeline of potential problem loans over the next 60-90 days. In addition, our non-accrual commercial loans has an average loan balance of approximately $392,000. And these loans are mainly comprised of loans acquired through acquisition and not from the Investors Bank underwriting process. For the year, net charge-offs were $7.8 million, which includes the $4.5 million charge-off on the wholesale in December. In 2015, our provision was $26 million, which exceeds net charge-offs by $18.2 million. The allowance for loan losses process is a continuing evolving process and we will continue to manage the banks in a prudent manner. Today, our commercial book is strong and we continue to grow and expand our lines of businesses. With recent events in the macro economy and the stock market, we will continue to be diligent in monitoring our credit quality and concentrations of risk, especially in light, our recent regulatory and accounting announcements regarding multi-family lending and the allowance for loan losses. Our deposit retail team had a strong quarter with growth of $722 million for the quarter ended December 31, or 5.4%. That growth equated to $1.9 billion for the year which is 15.5%. Our Roma and GCF acquisitions completed in December 2013 and January 2014, have experienced 25% growth over the last two-year period, and we continue to execute on our business plan of improving the deposit franchises of all eight of our acquisitions post integration. It was a tough year, it was a difficult year for both of our operations group and our retail teams due to core conversions. But we continue to work on our workflows and the branches to improve efficiencies and have commenced the project to evaluate and improve our net interest income throughout the bank. We continue to click on many of our strategic items and I think the future looks very promising for us. Now I would like to turn it over to Sean Burke our CFO, who will give some more details on the balance sheet and the income statements.

[Sean Burke:]

Thank you, Kevin. I will be brief here. For the period ending December 31, assets totaled $20.9 billion, an increase of 11% on an annualized basis from the third quarter. Our lending activity was solid during the quarter. Our loan portfolio increased $508 million to $16.9 billion quarter-over-quarter, which represents nearly 12% growth on an annualized basis. Consistent with prior quarters, C&I and multi-family and CRE continue to drive our loan growth. Our pipeline of loans at December 31, stood at a robust $2.4 billion with multi-family making up 41% of that pipeline, C&I 24%, CRE 26% and the remainder residential. On the liability side, deposit growth was very strong. Deposits grew $722 million or 22% on an annualized basis to $14.1 billion, the growth driven by both retail and commercial customers. Asset quality metrics remained strong compared with our comparable period third quarter. Non-accrual total loans were 0.68% at December 31 and our allowance for total loan ratio was 1.29% at the end of the year. Shifting gears to the income statement, net income for the quarter was $44.4 million or $0.14 per diluted share. Diluted EPS for the quarter grew 11%. Net interest income for the quarter rose 8% year-over-year to $151 million driven by strong loan volume, while net interest margin decline year-over-year and on a linked quarter basis to 3.05%. Prepayment penalty income totaled $4.5 million for the quarter, versus $6.4 million in the third quarter. The decline is a primary contributor to our margin decline. Provision for loan loss totaled $5 million, which is unchanged from the third quarter. Non-interest income totaled $8.7 million, a decrease of $2.6 million from the third quarter. The decline was a result of having a couple of non-recurring items in the third quarter remain steady in loan sales that really propped up the third quarter non-interest income. Expenses were relatively flat quarter-over-quarter and excluding a non-recurring item related to the payout under an executive employment agreement, expenses were down slightly quarter-over-quarter. Our effective tax rate was 35.5% for the fourth quarter, however this lower tax rate has been driven by 2015 tax law change that positively impact this year’s rate, but we’ll have the opposite effect in future periods. We continue to leverage our capital through share repurchase. We repurchased 6.3 million shares during the quarter, bringing total share repurchase to-date to 31.6 million. On that note, I’d like to turn it back over to Kevin for some concluding remarks.

[Kevin Cummings:]

Thanks, Sean. 2015 was a strong year, it was a great year for the company. We had record earnings, strong organic growth and continued expansion of our franchise. We completed our core conversion and we are on our path to expanding our capabilities in the areas of cash management and internet and mobile banking. Over the last three weeks, the executive management team has conducted town hall meetings at six different locations throughout our franchise, meeting with over 1,500 of our employees. We discussed with them our recent strong performance as a company that has grown from 400 employees and $5.8 billion in assets in December 2007 to over 1,700 employees and $21 billion in assets today. Our bank made $12 million in 2007 and now it expanded to $181 million in 2015. We want our employees to be proud of their efforts and their successes. Our team embraces the core values of company and we are on the road to creating one of the strongest banks in the country. Just yesterday we’re rated by Barron’s Magazine as number 20 in the listing of the top 100 banks in the country. Most importantly our message at the town hall meeting is that we need to continue to change, continue to get stronger and do things better. We cannot be satisfied with our efforts or the status quo. And if we’re not getting stronger, we are getting weaker and losing the momentum that has resulted in our success over the last eight years. We are revising on our employee training and development programs. But the goal was enhancing our employee’s capabilities to compete in the 21st century. We call this program, the Investors Edge, education, development, growth and enrichment. We want all our employees to be agents of change, be dynamic in their attitude and outlook to their jobs. In 2012 and 2013 we completed four acquisitions. 2014, was the year of the second step. 2015, was the year of strengthening our infrastructure with the core conversion. We executed on all three of these strategic initiatives and created value for our shareholders. 2016 is the year of our employees, and we are rolling out programs to invest in their careers and improve the potential and performance of this company. We need to get better at everything we do, competition is fierce, the regulatory environment continues to evolve, but more – and become more complex. But our view is that this current environment is to our advantage as we have the capital to use in M&A as a future tool to leverage our strong capital position. We are one of the strongest banks in the country with a tangible capital ratio of 15.4%. We have a proven track record of executing on our strategic plan which focuses on organic growth and smart acquisitions that does not dilute tangible book value. We see the M&A markets starting to heat up and we are well positioned to execute, now that the core conversion is behind us. I want to thank you – I want to thank all our employees for their participation in town hall meetings and their dedication for the company’s core values of character, commitment, community and cooperation. Investors Bank is a unique bank. It wants and strives to be a different bank, a bank that puts community back into banking, one that makes a difference with its employees, first and foremost and then its customers and together in partnership with the communities that we serve. This is our mission and if we continue to serve these constituencies, you – our shareholders will be rewarded. I want to thank you for your continued support and now I’d like to open it up for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jared Shaw at Wells Fargo.

[Timur Braziler:]

Hi, good morning, this is actually Timur Braziler filling in for Jared. Maybe the first question on the net interest margin trends, is it fair to assume that given the flattening of the yield curve here and just kind of where rates are at? We should expect to see some additional pressure in the beginning of 2016?

[Domenick Cama:]

Yes, but not significant pressure. So just to give you a sense, see the consensus estimate in terms of where our margin is projected to go throughout the year and we are comfort with that estimate. I believe if I’m not mistaken the street estimate is – calls for a margin for the year 2016 around 3%. We did see a quarter – from last quarter to this quarter really we’re seeing some of our prepayment income drying up and we’ll probably at a more normalized run rate there and we don’t see that actually go dipping significantly lower from where it is right now.

[Timur Braziler:]

Okay, that’s good color there. And then maybe just switching gears to the commercial loan growth. Just given the existing teams that are in place kind of what’s the remaining runway there or will you need to bring out some additional teams to kind of keep the pace going?

[Domenick Cama:]

Now, we expect that the loan growth will be at around the same pace that we run it in 2015. So we think that we have the teams in place to achieve that growth.

[Timur Braziler:]

Okay, great. And then just maybe one more on the deposit side. What’s been the traction and growing commercial deposits? Maybe what’s the balance at the end of year? And kind of what’s the runway to continue growing that?

[Domenick Cama:]

Commercial deposits represent approximately 40% of the overall deposit base, which is about $14 billion. We expect that will continue to grow as our C&I business continues to build. The C&I business has been a very good in contributing towards that growth in commercial deposits. We’ve introduced a new consumer checking product which has grown nicely over the past few quarters and that’s been helpful. And we will also have grown our municipal deposit business. At this point Investors Bank is the second largest provider of municipal deposit services in New Jersey and that business grew very nicely in the fourth quarter.

[Timur Braziler:]

Okay, great. Thank you.

[Operator:]

The next question is from Mark Fitzgibbon at Sandler O’Neill.

[Mark Fitzgibbon:]

Hey, guys, good morning.

[Sean Burke:]

Good morning, Mark.

[Mark Fitzgibbon:]

First question, Sean, I wondered if you could help us think about operating expenses in the first quarter. What those are – are those likely to be relatively stable excluding sort of a normal first quarter uptick?

[Sean Burke:]

Yes, again I’m going to point to kind of what the street estimate is out there, I think its $87 million. We feel comfortable with that, Mark. And then as we kind of progressed to the year, maybe a slight uptick quarter-to-quarter, I don’t know, call it marginal 1% maybe uptick quarter-to-quarter there, but that’s a pretty solid beginning point for the run rate.

[Mark Fitzgibbon:]

Okay. And then, you had said in your earlier comments that the effective tax rate will be higher in 2016. Does that bump up to sort of 36.5%? Is that a good bump do you think?

[Sean Burke:]

We wish, Mark, but actually it takes up to 39%.

[Mark Fitzgibbon:]

39%, okay.

[Sean Burke:]

39%, yes. We continue to look for ways to bring that down, but what we’re looking at right now is something that’s trending towards 39%.

[Mark Fitzgibbon:]

And then on the deposit front, I was curious, do you guys have any new promotional deposit campaigns going on in the early part of 2016?

[Sean Burke:]

No, Mark, we don’t. We don’t plan to run any high deposit or high rate campaigns for the first quarter.

[Mark Fitzgibbon:]

Okay. And then lastly, I wondered if you could sort of update us on what you’re seeing today in the M&A market. And maybe give us a sense if you’re – your focus in that respect has changed at all?

[Sean Burke:]

No. We have seen a little pick up in the M&A business obviously. They’ve been some transactions that have been done away from us that we’ve seen. But yes, our strategy has not changed, we continue to look for transactions that will provide synergies to us geographically business-wise. And we’re pretty steadfast on our dilution – level of dilution and earn back methodology also.

[Mark Fitzgibbon:]

Great, thank you.

[Domenick Cama:]

You know, Mark, we see things heating up in other parts of the country, and then we see things – it’s a regulatory environment and just the flattening yield curve, other companies, smaller companies might be feeling some more pain.

[Mark Fitzgibbon:]

Thank you.

[Operator:]

Your next question is from David Darst with Guggenheim Securities.

[David Darst:]

Hey, good morning.

[Domenick Cama:]

Hi, Dave.

[David Darst:]

Just follow-up on your M&A discussions, could you remind us kind of what is an acceptable level of tangible value dilution in the earn back for you?

[Domenick Cama:]

You know, Dave, when I think about a transaction, I always look at what the – to me, I go always with the earn back. And the earn back needs to be somewhere in that three-year to five-year category. And the – depending on what the transaction will do for the bank, will also then determine where on the scale it goes from three years to five years. But we’re pretty – pretty stringent on that earn back and recognize that it’s an important component of providing value to shareholders going forward.

[David Darst:]

Okay. And then just to prioritize a target is it – would it be geography, the loan production or something that fixes, it helps you in the loan to deposit ratio?

[Domenick Cama:]

Yes, I think first would be geography, we would look for or I would say that we’d put geography and loan production in the same – on the same line item. We are not really interested in doing transactions that are outside our market area in order to fix, if you will, the loan to deposit ratio. We are now looking for deals in Florida or Arizona or Ohio and then to make loans here in New York that’s not what the strategy is.

[David Darst:]

Okay, those are specific geographies. Then maybe just thinking about the fee income, I guess – there is some unutilized in the third quarter. Now what do you think the capacity is for us to see better fee income growth in 2016?

[Domenick Cama:]

You know, David, it is a very good point. We recognize that our fee income actually our non-interest income in total is low compared to our peers. We as a result of finishing this core conversion we are undertaking a project, if you will, in 2016 in order to examine all the aspects of our non-interest income in an attempt to increase non-interest income going forward. In the past, non-interest income has been influenced primarily by mortgage banking income which comes as a result of low rates. Now with the 10-year rallying to the point, it has over the last few weeks. Our guys in the mortgage company starting to see some refinance business pick up, so we could see some pickup there. But overall if we strip out mortgage banking income we recognize that we are pretty low and we’re committed to increase that number in 2016. But I couldn’t give run rate.

[David Darst:]

Yes. Do you think it comes from – on the retail side of the bank and core new account growth or is it maybe in the commercial segment…

[Domenick Cama:]

I think both. I think it comes in the form of service charges and fee income that come from service charges. And I also think it comes from a better account analysis techniques on commercial accounts. We’ve installed new core systems. We have better and stronger capabilities now. And that is going to be part of this initiative in 2016 to examine using those capability that we’ve just received from the new core system and apply it to our commercial deposit base. And we think that is going to be an area of significant improvement.

[David Darst:]

Got it. Great.

[Domenick Cama:]

And again, especially on the commercial side we were pretty aggressive in our pricing. And we’re going to evaluate some of the pricing opportunities that we have in the marketplace.

[David Darst:]

Got it. Okay, great. Thank you.

[Operator:]

Your next question comes from Dave Rochester at Deutsche Bank.

[Dave Rochester:]

Hey, good morning guys.

[Domenick Cama:]

Hey.

[Sean Burke:]

Good morning.

[Dave Rochester:]

Back on and then discussing, can you just talk about what interest rate assumptions you’re embedding in and then color? And then just a smaller point, you had a bump up in the securities yield this quarter, just wondering what drove that? Thanks.

[Sean Burke:]

In terms of the margin, we are – our rate forecast is really based on consensus estimates. So, we kind of had three rate hikes, if you will, built in there. One, that we saw in December, that obviously is we’re seeing the impact of that. Already we have one call for in June of 2016, and one in December of 2016. So that is what we’re using as the basis for our forecast.

[Dave Rochester:]

Okay, great. And then the bump up in the securities yield?

[Domenick Cama:]

On the securities yield, Dave, we had some – we are accreting income from a TruPS portfolio that we wrote down to a very low level back in 2010 – 2009. And some of those – and we continue to accrete income as those securities perform. There were some securities that paid off. This year and at this quarter and as a result, we were able to accrete all of the interest on those in a more condensed period of time. And that had the effect of increasing the yield on securities book.

[Dave Rochester:]

Okay. Great, that’s a good color there, thank you. And then on loan pricing, that the curve has been all over the place, but generally it’s been under pressure recently. Can you just talk about where you’re pricing multi-family product and commercial real estate product today? And then just given the rate hike that will little help your C&I loan pricing.

[Domenick Cama:]

Yes, it was interesting the yield curve, as a ten-year and the five-year, we’re coming down, we’ve recognized that some competitors had increased their multi-family rates. And so, we initially increased our multi-family rate from 3.25% to 3.38%. Subsequently as the ten-year started, continued to rally, we lowered our five-year multi-family rate back down to 3.25% and commercial real estate is at 3.50%. So that’s where we are right now. In terms of the pickup in C&I income, as a result of the interest rate increase, we haven’t seen any significant movement there at this point. The amount of C&I business that floats to treasuries and LIBOR is small relative to the overall portfolio. So we don’t expect that we’ll see a significant increase there. And actually, we’re not – here at the bank, we are not projecting rate increases, we’ve already built one into our models, but we’re not projecting one until the later part of 2016. It looks like the March increase won’t happen but we’ll see.

[Dave Rochester:]

Got it. And then have you seen any competitors raise rates on deposits close to hike?

[Domenick Cama:]

Yes, we actually have a number of competitors who are raising rates obviously here in the Northeast, we have a number of institutions who have high loan to deposit ratios and there is significant loan business to be done. And we’re seeing a number of both advertised and unadvertised specials. Our retail deposit people, our branch people are continuing to tell us that larger institutions are bringing in and are being more competitive on rates, but in an unadvertised way. And so, at this point we’ve decided that we’re not going to run any high rate campaigns, but we will try to compete on a one-off basis, if we have to.

[Dave Rochester:]

Okay, great.

[Sean Burke:]

Yes, but just to give you some additional color on the – in the month of December our business lending in the maturity level of one to three years, we had about $150 million of originations and an average yield of 4.46% versus the multi-family product that basically was at 3% in a quarter. So we do on the business side, which is, it’s almost 1%, over 1% more than the multi-family.

[Dave Rochester:]

Is most of that fixed rate structure, I guess?

[Sean Burke:]

It’s a mixture, it’s a mix, it’s about most of it is fixed.

[Dave Rochester:]

Okay. Great, thanks for the color guys. Appreciate it.

[Operator:]

Your next question is from David Bishop with FIG Partners.

[David Bishop:]

Hey, good morning gentlemen. I just wonder if you could go over some of the details in terms of the loan pipeline again, where it was strongest in the product type?

[Domenick Cama:]

The pipeline is it about $2.4 billion Dave. It’s about – I’m sorry, $2.2 billion, $1.6 billion in multi-family and about – sorry, $2.2 billion, $1.6 billion CRE, $600 million in C&I. Of the $1.6 billion in CRE approximately 60% of the $1.6 billion is multi-family and the rest is commercial real estate.

[Sean Burke:]

And then I’d just add, Domenick mentioned $2.2 billion versus a number that I threw out $2.4 billion in that pipeline. Domenick was talking commercial, production and percentages. And so, there’s $200 million roughly of residential pipeline in there that gets added to the number Domenick just quoted.

[David Bishop:]

Got it. Have you seen sort of – the regulators obviously put a shot across the bow regarding CRE and concentrations? Do you see that having any sort of near-term effect to you guys? Are you still pretty good in terms where you’re standing from a concentration standpoint?

[Domenick Cama:]

Yes, I think that we – right now we’re pretty good in terms of our numbers versus –commercial real estate versus risk-based capital. But that doesn’t mean that, we don’t continue to look at it and focused on it. And I think the shot across the bow from the regulatory agencies is really more about their concern that the market has heated up especially here in the Northeast, cap rates have fallen. And while we don’t think that is any cause for concern because we know all of the lenders here all do a pretty good job. I think the message is, hey guys, take a look at your underwriting standards. Make sure you’re managing risk the right way. We’ve seen some loosening of credit standards that the regulatory agencies speaking, we’ve seen some loosening of credit standards. And this is not the time to be doing more IO business. This is not the time to be doing – putting more cash out on loans and refis. And so we’re taking a very serious look at the guidance. And we’ve actually embarked on a project in our risk management group to look at all around – all of our underwriting standards to make sure that they are up to par with in accordance with the guidance that came out recently.

[David Bishop:]

Got it. Thanks for the color.

[Operator:]

Your next question is from Martin Friedman with FJ Capital Management.

[Martin Friedman:]

Hi, good morning guys. Thanks for having the call. I think you addressed my question, really was on – number one is on payback periods for M&A. In light of a fault to your careless report that came out today which seems like it miscalculated your intentions on doing a potential transaction. As shareholders we appreciate, you’re staying in the three-year to five-year time frame.

[Domenick Cama:]

Yes, Martin.

[Martin Friedman:]

Number one you have a…

[Domenick Cama:]

No, Martin, you know thank you for the – for the call. Obviously, we are committed to that three-year to five-year time frame. We have shareholders here, we recognize the impact of dilution and obviously we have to balance that with continuing to grow our franchise. But unequivocally if someone came to us with a deal that showed a nine-year payback, we would show them where the elevator was and how to get out the door. That’s not a transaction that we would be doing.

[Martin Friedman:]

Thank you. Also I just wanted to get an update on the capital management, I mean with your stock so incredibly cheap, how aggressive would you be at these levels?

[Domenick Cama:]

Yes. That’s a great point, Martin. So, we have been aggressive buying back stock right now. And I would fully expect that the number that we quoted for this quarter of 6.2 million shares that we would exceed that in the first quarter. And we’re well on our way.

[Domenick Cama:]

Great guys, thanks. Keep up the good work.

[Sean Burke:]

Thank you.

[Domenick Cama:]

Thank you, Martin.

[Operator:]

Your next question is from Collyn Gilbert with KBW.

[Collyn Gilbert:]

Thanks, good morning guys. Just back on your comments, I think Sean, I don’t know if that’s Sean or Dom that mentioned it, but I think, Dom maybe it was you, on the deposit side where you had indicated that you don’t have any plans to do deposit campaign in the first quarter. Any reason why I mean, I guess that speaks perhaps to comfort in other deposit generation sources, but just if you could sort of talk us through the rationale behind how you’re thinking about the cost of the incremental deposit?

[Domenick Cama:]

Well, just I’ll address the first point, and that is that, we obviously managed the loan to deposit ratio pretty closely, calling in – it came in a number that’s comfortable that – we’re comfortable with at a 120%. And so, to the extent that, how loan to deposit ratio stays in that 120% range. And it’s been there for the last few months and we’re projecting that it will be there actually throughout the year, that there’s no reason to jump into a deposit campaign at this point. We recognized obviously, and you can see it in our cost to deposits that the impact of running those campaigns, back to back has had a detrimental effect on our cost to deposits, moving it from 64 basis points in September to 67 basis points. So, at this point, we’ve decided that we’re going to continue to focus on business deposits. We’re going to continue to focus on bringing these consumer deposits into this low interest rate checking, but for the time being given our projections, we don’t see and not seeing our loan to deposit ratio rise above that 125% level. That is no reason to do it. Now let me also add that, that 125% loan to deposit ratio number that we recite in meetings and on calls with investors really is self-imposed. I mean, I can point to three or four different institutions who recently reported their loan to deposit ratio is being – and these are the institutions here in the Northeast – their loan to deposit ratio is being north of 130%. So, we have capital, if we had to get to 130% at the expense of keeping deposit costs low. There’s nothing that says we can’t do it, we think, as long as we continue to manage our liquidity closely. And our liquidity is very strong, it just this loan to deposit ratio which is off a little bit. So, my answer to your question is, no reason to do it, loan to deposit ratio is under concern – no concern. We have it under control and we have several other things going on not only on the retail deposit front, but also in the wholesale deposit front. We again, municipal deposit business has been pretty strong. We’ve won several new accounts over the last two months and that has helped our deposits also.

[Collyn Gilbert:]

Okay. That’s great color. And then just on the loan discussion point, so if we looked at, where that pipeline stood at the end of the year, Dom, as you give us metrics on the commercial side, how do you see that pipeline evolving if we were fast-forward to the end of 2016? I guess, questioning, or just curious how you think about multi-family on an ongoing basis?

[Domenick Cama:]

Yes, I think multi-family – within the CRE space Collyn, multi-family will continue to be the strongest product that comes in. That number has not budged of the 60% – the 60% off of the commercial real estate piece. What has enhanced our overall portfolio is the addition of $600 million in C&I lending. And that has – that’s different than two years ago, when we were reporting a $1.8 billion in pipeline. And that was all CRE in 60% of the $1.8 billion. Now we have the benefit of adding this C&I business to our portfolio. We’ve built out those teams. Those teams are now starting to deliver. And we will get the full benefit of those teams going through 2016 and 2017. So, but as far as a product type, I still – we love multi-family product. We think it’s a great product. And as long as you underwrite it right, and this is the discussion we had with the regulators all the time. We’ll continue to put it on our balance sheet.

[Collyn Gilbert:]

Okay, okay that’s helpful. And then just one last question on the reserve. Maybe if you guys could just talk a little bit, how you’re thinking about the reserve level as we go forward. I mean, you guys are sitting here at twice the reserve of some of your peers. And it’s certainly debate is going on as to what the right reserve is? But, maybe just talk about how you guys are thinking about the reserve and building into provision as we go forward?

[Sean Burke:]

Yes, Collyn, I think we feel comfortable with where it is, if you kind of look at reserve levels for – if you just take like the SNL bank in thrift index. I think, their allowance, the total loan ratio for the whole industry is around 129%. That is right on top of where we are. Now, we’ve seen others – we do see around our area that may have lower reserves. But we’ve been growing our business pretty rapidly here. And I think that rapid growth obviously plays into how we think about the portfolio and not having sort of the necessary loss experience that others may have the benefit of. I think that kind of plays into our allowance in how we think about the build of that allowance.

[Collyn Gilbert:]

Do you anticipate, Sean – building, continue to build from here – I know, it in the fourth quarter, but continue to build or do you feel like that, at that 130% or so is the right level to hold on a percentage basis?

[Sean Burke:]

It all depends what happens in terms of market conditions, but if things trend the way they are, I think there is a trend there, Collyn that you can see, where it’s kind of been coming down. And so, if we kind of stay in this economic pattern, I think you will see that starting to trend down. And, if for instance that – we run into some speed bumps and all of a sudden start experiencing losses, then it’s going to start to move in the other direction. But I think, if we’re kind of continued on this path, and our asset quality ratio is continue to improve and we don’t have the loss history then, yes it’s going to start to come in.

[Collyn Gilbert:]

Okay, that’s right. Thank you guys, I’ll leave it there.

[Operator:]

The next question is from Matthew Kelley with Piper Jaffray.

[Matthew Kelley:]

Yes, hi guys.

[Domenick Cama:]

Hi, Matt.

[Sean Burke:]

Hey, Matt.

[Matthew Kelley:]

Just the follow-up on Collyn’s question there about provisions and reserves. What do you kind of target for a provision on incremental growth and rent stabilize, rent control multi-family in particular?

[Sean Burke:]

Roughly a reserve percent around there, I think its 1% to 1.25% somewhere in that area. So if you think about sort of the production thing put on and Domenick talked about our pipeline and what’s coming in where multi-family is a big chunk of that that’s a pretty good number to use in terms of a provision expense.

[Matthew Kelley:]

Okay, on incremental growth going forward.

[Sean Burke:]

Right.

[Matthew Kelley:]

Okay.

[Sean Burke:]

I do look at the street estimate. Honestly it does feel in the way of provision, there has been a pattern where you see our provision expenses it’s kind of come off and I do think the street number may be a little high relative to that provision expense.

[Matthew Kelley:]

Right. So why do you thing some in the space of no provision on incremental growth for the exact same asset class collateral market et cetera? That’s a pretty big difference. You guys at 1% and may others at fairly modest levels. What accounts for that difference?

[Domenick Cama:]

No, we – to be honest I have to look at, we’d have to look at the entity that you are talking about is probably very explainable differences between maybe our portfolio and their portfolio. But, it’s hard to say without trying to figure out who we’re talking about here.

[Matthew Kelley:]

Yes. Okay.

[Domenick Cama:]

And one of the things – Matt, we take a very prudent approach here. We want to be – because of the lack of seasoning of our portfolio in the growth to portfolio, it’s a significant item in our evaluation of the allowance for loan losses. Somewhere these other provision agencies have been in the business for generational like that. And we just take it probably a different approach and that haven’t seen what they are doing. I can’t really comment any further.

[Matthew Kelley:]

Fair enough. Can you just give us an update on the branch opening plans for 2016 and maybe beyond? And what the cost of the opening – those openings will be baked into your expenses and what you have differ guidance, just an update there, I mean on the branch plans.

[Domenick Cama:]

Sure, we’re looking at opening – depending on construction and approvals nine branches in the New York region and five branches in New Jersey in 2016. And then the average cost…

[Sean Burke:]

The cost per branch is usually somewhere between $750,000 to about a $1.5 million.

[Matthew Kelley:]

Okay. Annual operating cost runs through P&L?

[Domenick Cama:]

Yes – no, I don’t know, that’s the costs who actually build the branches.

[Matthew Kelley:]

So to build, okay. What about operating cost on that we’ll see it through the expense lines?

[Domenick Cama:]

I don’t have those numbers here, Matt. I can get them to you.

[Matthew Kelley:]

Okay.

[Domenick Cama:]

But the operating expense is pretty low. We staffed with five people – four to five people. Yes, we keep those numbers low but I’d be happy to share those numbers with you off-line.

[Matthew Kelley:]

Okay, all right. And then, has there been any change at all on the percent of loans that are beyond the five-year term that going into the portfolio? And what are you thinking about just to know, sustained low interest rate environment, your willingness to put on some longer duration type assets – it’s a tough thing to project, where we’re going to be 12 months, 18 months, 24 months from now to shape the curve but are there some internal types of discussions or limits that you have talked about, in terms of longer duration assets that you’re willing to kind of max out at?

[Sean Burke:]

No. We don’t have specific numbers, but I can tell you that the way we’ve repriced our multi-family portfolio, we increased the rates on our longer-term products two weeks ago and haven’t lower them. So, for example, our multi-family, our five-year multi-family product was at 3.25%. We increased it to 3.38%. We took it back down to 3.25%, a few days ago. Our seven-year product was at 3.5%, we increased that to 3.58%. We have not taken that back down. So that’s a signal that we are concerned about longer duration assets, especially in light of this interest rate environment. And we’re trying to do more five-year product.

[Matthew Kelley:]

Okay, gotcha. Thank you very much.

[Operator:]

Our next question is from Matthew Keating with Barclays.

[Matthew Keating:]

Yes, thank you. Most of my questions have been addressed, but I did have one. I appreciate that you’re coming off of a series of town hall meetings at the organization. And we did notice in the press release that you noted that so far this year, the competitive environment seems to be getting a bit more intense. So, I was hoping you can provide some additional perspective in terms of what your employees are seeing, what your lenders are seeing in the marketplace, particularly with some competitive disruption at the movement given at least one kind of merger that’s still pending? Thanks.

[Sean Burke:]

Yes, Matt, I’ll tell you, one of the biggest issues that we faced at loan committee meetings on a weekly basis is, and this is a – I won’t say a point of contention between the committee and the lenders is the personal guarantees. We generally in the multi-family space, you don’t have personal guarantees. I mean, you underwrite those properties based on cash flows and loan-to-value ratios and obviously the character of the sponsor. And, our policy calls for us to require personal guarantees on non-multifamily product that is commercial real estate, shopping centers, office buildings. And what we’re seeing from – in the competitive landscape is that there are more lenders who are willing to do some of these CRE type deals that is a non-multi-family deal without PG’s. We had a deal came to committee the other day, I’ll be brief, it came to committee the other day. And it was a commercial project down in the Philadelphia market. And the lender said that the customer had several other bids from those who didn’t – who did not require a personal guarantee. And we sent the lender back and said to him that, we want some level of PG on it or else he can go to one of these competitors. So that’s an area that we continue to see and that’s disturbing to us because it hinders our ability to diversify the portfolio into a more commercial real estate type product, which is something that we’re trying to achieve. So you ask for an example and that is one.

[Matthew Keating:]

And that’s helpful, thank you. And I guess the last quarter on expenses for 2016 you sort of said low single-digit range might be a realistic expectation. It sounds from today’s comments that it’s kind of a bit higher. Is that fair? And what’s driving that increase primarily? Is it just more infrastructure investments or is it hiring more, more bankers et cetera? Thanks.

[Domenick Cama:]

We might have obviously – the bank has grown quite a bit. Recently we issued a press release that announced the hiring of new a General Counsel and a new Chief Risk Officer. In light of the regulatory environment, in light of our growth, we have and are prepare to invest more money in our risk management infrastructure. It is a major initiative for our company in 2016 and something that we’re focused on. And it’s an area that we do not believe we can skimp on. And so the higher expenses numbers that that Sean sited earlier today really come from this additional personnel and staffing that we’re bringing in, in addition to a different tools that will need in order to manage our infrastructure.

[Sean Burke:]

For the course of not doing that and not making the compliance and risk management investment is a lot more expensive than not doing it – if we don’t do it. So we think it’s a good investment, it will help in the M&A world and as we move forward it will help in our – dealing with regulatory risk.

[Matthew Keating:]

Thanks for the color.

[Domenick Cama:]

Thank you.

[Operator:]

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

[Kevin Cummings:]

Okay. Well, thanks, Amy, and thank you all for participating on the call. Have a great weekend. And let's go Broncos and Peyton Manning. All right, good luck to all. Bye-bye.

[Operator:]

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