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Flushing Financial Corp  (NASDAQ:FFIC)
Q4 2018 Earnings Conference Call
Feb. 01, 2019, 9:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Welcome to the Flushing Financial Corporation's Fourth Quarter 2018 Earnings Conference Call. Hosting the call today are John Buran, President and Chief Executive Officer; and Susan Cullen, Senior Executive Vice President, Treasurer and Chief Financial Officer. Today's call is being recorded. Today, there will also be an opportunity to ask questions. (Operator Instructions)

A copy of the earnings press release and slide presentation that the Company will be referencing today are available on its Investor Relations website at flushingbank.com. Before we begin, the company would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements.

Such factors are included in the company's filings with the U.S. Securities and Exchange Commission. Flushing Financial Corporation does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and for a reconciliation to GAAP, please refer to the earnings release.

I'd now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategies and results.

John R. Buran -- President and Chief Executive Officer

Good morning everyone and thank you for joining us for our fourth quarter 2018 earnings call. On today's call as always, we hope to provide additional insight into our consistent positive earnings power, business strategy and sustainable competitive advantage. I'll begin with our fourth quarter and full year 2018 highlights and then provide an overview of the strategies we are executing to continue to create long-term shareholder value. Then our CFO, Susan Cullen will review our financial performance in greater detail. Following our prepared remarks, Susan and I will address your questions.

Beginning on slide three, fourth quarter '18 GAAP diluted EPS was $0.44 and core diluted EPS was $0.54. The $0.10 difference between GAAP and core earnings per share is attributable to net loss from fair value adjustments of $0.09. Net loss on sale of securities of $0.05 and net gain on sale of other assets of about $0.03. GAAP and core earnings were positively impacted by a reversal of a previously accrued tax liability of approximately $2 million. We are pleased with our ability to generate strong earnings growth and return on average equity of over 9% and core return on average equity of over 11%, despite continued margin pressure. Net interest income of nearly $41 million was down modestly quarter-over-quarter and year-over-year due to net interest margin pressure driven by higher funding costs which outstripped our ability to mitigate through loan repricing.

However, despite the cost of funds increasing 12 basis points quarter-over-quarter, the core NIM fell only 3 basis points. As a reminder, core NIM is net of prepayment penalties, recovered interest on delinquent loans and accretion of discount on CLO securities. The increasing yields on new loans and the repricing of variable-rate loans had a positive NIM impact year-over-year. Variable rate products represented approximately 78% of our new loans and 46% of our new investment securities during the quarter. Although under a free fed rate hike scenario, we expect NIM compression in 2019. We do have over $2 billion of loans repricing through 2021, allowing us to continue to manage future compression on net interest margin.

In the fourth quarter, $152 million of mortgage loans repriced up an average of 57 basis points. Also approximately $450 million of forward swaps entered into in late 2017 have provided a benefit of a basis point to the quarter's net interest margin. These swaps are expected to increasingly benefit our net interest margin as rates rise. We are pleased to report another quarter of strong loan closings. During fourth quarter '18, loan closings totaled $345 million, our highest quarterly production this year. Our loan portfolio yield increased 27 basis points from fourth quarter '17 representing a successful execution of our strategic objectives.

Our stated focus of emphasizing rate over volume and reducing our liability sensitive position has resulted in a net loan growth of over 3% from the linked quarter and over 7% for the full year. Similar to the prior quarter, we allowed $15 million of participations within another financial institution to prepay as the rates offered through the refinancing process did not meet our criteria. Year-to-date, we have allowed approximately $154 million of participations to repay rather than refinance at a rate below our criteria. Emphasizing rate over volume resulted in a 75 basis point increase in average loan yields on loan closings in fourth quarter '18 compared to those booked in fourth quarter '17. While the yield on loan closings increased 41 basis points from the linked quarter. The increase in new loan volume and yields combined with the repricing of adjustable-rate loans resulted in a 9 basis point increase in the yield of total loans to 4.38% in fourth quarter '18 from 4.29% in third quarter '18, excluding prepayment penalty income and recovered interest.

Over the past year, C&I loans which are primarily adjustable-rate loans have represented 38% of new loan closings. In addition, the loan pipeline totaling $197 million as an average yield of 5.12% compared to $355 million at 4.68% in the linked quarter and into yield improvement on the asset side of the balance sheet. We have progressed in our goal of achieving a loan to deposit ratio closer to 100% through deposit growth. At December 31, 2018, the loan to deposit ratio improved to 112% from 114% due to total deposits increasing $258 million from the linked quarter or 6% non-annualized while retail deposits increased $105 million during the same period.

A prominent feature in the growth of retail deposits in the win -- is the Win Flushing program, which focuses on increasing our deposit market share in the Asian community in Flushing, Queens. Flushing Bank has a long-standing relationship with the Asian community beginning with our roots in Flushing, New York. Our employees speak over 20 languages with Cantonese and Mandarin being prevalent in the Chinese markets we serve. Through the fourth quarter, we have captured over $143 million in deposit growth through this program and remain on pace to achieve the target of $160 million in deposits, by the end of first quarter 19.

Central to the Win Flushing program has been the conversion of Flushing branches to the new Universal Banker model, permitting staff to spend more time with customers. As of year-end, we have 15 branches operating under the Universal Banker model. In the branches that have been converted, we have experienced an increase of over 120% in transactions processed at ATMs to almost 60% of all branch transactions. Thereby reducing our customer's reliance on tellers and more importantly an increase of over 30% in total brand sales, as sales per employee increased approximately 50% due to our brand staff focusing more time on sales opportunities.

As previously discussed, we expect to have the remaining branches converted to the Universal Banker Model by the end of 2019. We also opened up a new branch in Chinatown, New York on December '17. Our new Chinatown location continues the planned expansion of our highly efficient Universal Banker model and leverages this long-standing relationship with the Asian community. This customer-centric model encourages customer engagement by combining innovative technology with a full service staff. We have been actively managing our non-interest expenses, these expenses decreased 5% from the previous quarter and were flat from the fourth quarter of 2017. In comparison to 2017, non-interest expenses increased to 4% for the full year.

Our credit quality remains pristine. At the end of the fourth quarter, non-performing loans were just 29 basis points of gross loans and non-performing assets were only 24 basis points of total assets.

Slide four, shows GAAP EPS was $1.92, up 36% year-over-year, while we achieved record core EPS of $1.94, up 24% year-over-year. In 2018, we had record loan originations of $1.3 billion. Net loans were up 7% year-over-year, while total deposits were up 13%. Now referring to slide five, we remain focused on these key areas, exceeding customer expectations, enhancing earnings power, strengthening our commercial bank balance sheet and maintaining our strong risk management philosophy. Our sustainable competitive advantages include our ongoing focus on developing and maintaining a multilingual branch staff to serve our diverse customers in the New York City market area. The Asian banking market surrounding our branches has attractive business dynamics, including a high degree of savings, available deposits and a significant number of small business owners.

We have a strong focus on this community where we have over $600 million in deposits. These deposits have a lower cost of funds than our total cost of funds. Overall, we remain very well positioned to further deliver profitable growth with long-term value to our shareholders as we continue to execute on our strategic objectives summarized on slide six. Manage cost of funds and continue to improve funding mix, increase interest income by leveraging loan pricing opportunities and portfolio mix, enhance core earnings power by improving scalability and efficiency, manage credit risk and to remain well capitalized under all stress test scenarios.

During the fourth quarter, we repurchased over 42,000 treasury shares at an average cost of $22.27 per share, and as of December 31, 2018 approximately 467,000 shares remain under the current authorized stock repurchase program, which has no expiration or maximum dollar limit. Overall, we remain well capitalized and our focus on strategic objectives enables us to further deliver profitable growth and long-term value to our shareholders.

Now, I'll turn it over to Susan to discuss the quarter's financial results in greater detail.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Thank you, John. I'll begin on slide seven. Total loans are $5.5 billion, up more than 3% quarter-over-quarter and 7% year-over-year as we continue to focus on the origination of multifamily commercial real estate and commercial business loans with full banking relationship. These originations totaled 87% of loan production for the fourth quarter, we continue to diversify our loan portfolio as C&I originations for the quarter of 34% of total originations and 38% over the past year.

For the first time, business loan closings exceeded multifamily closings for the year and for the quarter. Commercial business balances have grown 18% this year approximately 16% of gross loans as of December 31, 2018. The growth in the C&I portfolio offers several advantages to the company, primarily continued diversification of the loan portfolio. And as these are primarily adjustable-rate loans, the yield offers more protection in a rising rate environment.

At December 31, our loan pipeline totaled $197 million, which is down from last quarter. The composition of the pipeline was 60% adjustable rate product and 32% fixed rate. The interest rate of the mortgage loan of the pipeline increased from last quarter to 5.12%. The loan-to-value on our real estate portfolio at quarter end remains a modest 39%, and the debt service coverage ratio on the current quarter's origination of multifamily, commercial loans and one-to-four family mixed-use loans is 164%. We underwrite and stress-test each individual loan using a cap rate in excess of the mid-5s.

The slide eight, highlights the evolution of our funding mix. As funding has grown over the years, the percentage related to CDs and borrowings has decreased. When the need arises to access the wholesale funding markets, we can advantageously ladder out the liabilities for longer terms. Core deposits increased 8% quarter-over-quarter and 12% year-over-year totaling 68% of all deposits at December 31 compared to 37% at December 31, 2006.

On slide nine, you see the deposits increased almost 6% quarter-over-quarter and 13% year-over-year. Growth was primarily driven by money market CDs and non-interest-bearing accounts. We continue to focus on the growth of core deposits with an emphasis on the non-interest-bearing deposits, which increased 7% year-over-year. Non-interest-bearing deposits of nearly $414 million represent 8% of total deposits. We continue to see rate pressure with increased competition for deposits. The quarterly cost of funds increased 12 basis points from the prior quarter. We remain disciplined in terms of deposit pricing while remaining competitive within our markets.

Turning to slide 10, net interest income for the fourth quarter of 2018 was about $41 million down modestly quarter-over-quarter and year-over-year. Net interest margin at 2.55% decreased 16 basis points quarter-over-quarter and 35 basis points year-over-year. Excluding prepayment penalty income and recovered interest from delinquent loans, core net interest margin would have been 2.48%, a decline of 3 basis points quarter-over-quarter and 29 basis points year-over-year. We expect continued margin pressure through 2019.

As John noted in his remarks, we have over $2 billion of loans repricing through 2021, and during the fourth quarter $152 million in mortgage loans repriced up an average of 57 basis points. Our overall cost of funds for the quarter was 1.75%, an increase of 12 basis points quarter-over-quarter and 58 basis points year-over-year. In order to partially mitigate margin compression. We have taken the following steps, which are summarized on slide 11. Focused on yield versus volume for the sixth consecutive quarter. The yield on loan originations have exceeded the quarterly yield on the loan portfolio, net of prepayment penalties and recovered interest from delinquent loans.

We've entered into a forward swaps totaling approximately $450 million, of which approximately $350 million has been funded as of December 31, 2018. The forward swaps provided benefit of 1 basis point in the current quarter's net interest margin, and we project these swaps will enhance earnings as rates continue to rise. Loan originations yields have increased 41 basis points from the third quarter of 2018. We have $2 billion of loans repricing from the low to mid 4-handle to mid to high 5-handle. Originations of commercial business loans, which are primarily adjustable, totaled 34% in the current quarter's originations and now comprise 16% of the loan portfolio.

Additionally, we sold $120 million securities yielding 3.7%. We anticipate this transaction to aid our net interest margin and earnings per share and break-even in approximately two years. We actively managed funding costs and continue to evaluate strategies to mitigate our liability-sensitive balance sheet. While net interest margin will likely remain pressured, we continue to focus on driving net interest income by executing our mitigation strategies again cost of funds increases coupled with leveraging loan pricing opportunities and portfolio mix.

Moving to slide 12, 2018 annual expenses increased approximately 4% as anticipated from 2017 driven by growth of the bank. For the fourth quarter. The non-interest expense of $25.8 million, a decrease of 5% quarter-over-quarter due to the lower BOLI split dollars life insurance expense. Excluding the reduction, the split balance insurance expense, non-interest expense was $26.4 million, a decrease of nearly 3% quarter-over-quarter, but still an increase of 4% year-over-year. Efficiency ratios is below 59% in the fourth quarter of 2018, compared to 61% third quarter of 2018 and 55% in the fourth quarter of 2017.

Our long-term goal remains achieving an efficiency ratio in the low to mid '50s. We are focused on continuous improvement and new opportunities in our operations for efficiency gains. Regarding taxes, the effective tax rate was just under 8% in the fourth quarter 2018 benefiting from the release of previously accrued tax liability. Excluding the release of the tax liability the effective tax rate was approximately 21% in the fourth quarter. In 2019, we approximate effective tax rate between 19% and 20%. Now, turning to credit quality on slide 13. Our credit metrics remained excellent this quarter. As a reminder, we are a historical seller of non-performing credits and record charge-offs early in the delinquency process.

Our improving credit quality metrics results in our coverage ratio increasing to 129% from 112% as of December 31, 2017. In the fourth quarter we recorded a provision of 400,000. The average loan-to-value of our non-performing real estate loans was approximately 35% based upon the value of the underlying collateral at origination, and we do not adjust appraisal value for increases. Given the low loan-to-value associated with the non-performing real estate loans, we do not foresee an increase to related expenses. Looking forward with expected loan growth we anticipate recording provision for loan losses proportionate with that growth in future quarters to maintain an adequate reserve.

On slide 14, non-performing loans are about $16 million up from under $13 million in the prior quarter due to four non-accruals delinquent business banking loans. Positively non-performing loans still declined 10% year-over-year as credit quality remains one of our core strengths. We reported net recoveries of $214,000 for the fourth quarter 2018 reflecting our conservative underwriting and diligence in the collection process. For the annual period, we recorded net recoveries approximately $20,000.

Slide 15, shows 90-day delinquencies as a percentage of loans originated by year. Here, you can see the results of our strong underwriting discipline as there are only six loans delinquent greater than 90 days for the last nine vintage years. Overall, our credit quality remains pristine.

I'll turn it back to John for some closing comments.

John R. Buran -- President and Chief Executive Officer

Thank you, Susan. On slide 16. I would like to conclude by reviewing why we believe we are well positioned for continued consistent and profitable growth. We articulated, our strategic objective to focus on yield rather than volume in the loan portfolio. The yield on our new loan originations for the fourth quarter of 2018 increased 41 basis points from the third quarter of 2018 and 75 basis points from the fourth quarter of 2017. We have targeted reducing the loan to deposit ratio through deposit growth. The increase in the deposit balances, especially in the retail sector resulted in an improvement of the loan-to-deposit ratio of 6% to 112% from 118%.

Disciplined loan growth is an important goal of the company. Loan closings in the fourth quarter of 2018 were a record for us. We previously projected loan growth in the high single digits with actual growth at over 7% for the year. We've talked about controlling net interest margin pressure. The core net interest margin decreased 3 basis points from the core net interest margin recorded in the third quarter of 2018. We've taken steps to mitigate the NIM compression, and in this quarter we positioned the investment portfolio to further aid in mitigating future compression.

We have contained non-interest expenses in this slow rate environment. Expenses decreased in the fourth quarter of 2018, as compared to the third quarter of 2018 and the fourth quarter of 2017 while only increasing a mere 4% from full year 2017. The Win Flushing program established to increase our market share in our home market has been very successful. As we've gathered to date $143 million in new deposits as compared to our target of $160 million by year-end, by the end of first quarter '19.

The investment in the Universal Banker model is paying dividends. Universal Bankers are spending more time with customers. The additional time has resulted in sales increasing over 30% in total and approximately 50% per branch employee. Our vision is to be the preeminent community financial services company in our multicultural market by exceeding customer expectations and leveraging our strong banking relationships. The New York City market with its strong Asian customer base continues to represent a significant opportunity for us.

In conclusion, our strong balance sheet risk management philosophy, capital levels, ability to grow deposits, investments in talent, innovation and cyber security, all position the company very well to deliver consistent profitable growth and long-term value to our shareholders.

We will now open it up to questions. Operator, I'll turn it over to you.

Questions and Answers:

Operator

Thank you. (operator instructions). Our first question today comes from Mark Fitzgibbon with Sandler O'Neill & Partners. Please go ahead.

Mark Fitzgibbon -- Sandler O'Neill & Partners -- Analyst

Hey guys, good morning.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Good morning,

John R. Buran -- President and Chief Executive Officer

Good morning, Mark.

Mark Fitzgibbon -- Sandler O'Neill & Partners -- Analyst

Susan. First question, the first quarter is always a little unusual with those compensation items for board fees and such they coming. Could you help us think about what the dollars might -- dollar numbers for expenses might look like in the first quarter?

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

I would expect the dollars in the first quarter to be up between $2.5 and $3 million, $3.5 million somewhere in that ballpark.

Mark Fitzgibbon -- Sandler O'Neill & Partners -- Analyst

Okay. And then secondly, I heard what you said on the tax rate, 19% to 23% which is a pretty big range. What would cause it to be sort of ' 19 versus '23. One of the main things that you are still not sure about?

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

It'll be the allocation, while we finalize our tax return for 2018 and allocations may change, that may tweak that rate a little bit.

Mark Fitzgibbon -- Sandler O'Neill & Partners -- Analyst

Okay, got you. So, all right, and then next. I'm curious, what are you guys thinking, how are you thinking about your targeted tangible common equity ratio or regulatory capital ratios. What do you kind of managing too?

John R. Buran -- President and Chief Executive Officer

So we, stress test these on a regular basis and we manage it, so that we feel we have an adequate level of free capital in order to complete our strategic plan.

Mark Fitzgibbon -- Sandler O'Neill & Partners -- Analyst

Okay. And do you feel like you have plenty today.

John R. Buran -- President and Chief Executive Officer

Yes, we feel, we're in good shape today.

Mark Fitzgibbon -- Sandler O'Neill & Partners -- Analyst

Okay. I guess, what I was curious about John is -- would it make sense maybe to slow the balance sheet growth given some of the NIM challenges that you have and divert some of that capital toward stock repurchases, given how an expense at the stock price is today?

John R. Buran -- President and Chief Executive Officer

So, obviously the preference of the company has always been to create new customers and that's always our emphasis. What we've been trying to do with the loan portfolio, in spite of the fact that we had nice loan growth, is focused on yield versus volume and obviously, you've had some positive impact there. So, I would say, our first priority continues to be creating new customers -- creating new customers, particularly that are coming to us through non-broker channels, that group of customers is increasing, not only in the C&I business, which is basically a direct-to-customer business, but also greater and greater proportion of the real estate business.

Our traditional real estate business is coming, based upon some direct business we're doing. So, while I think there is -- there clearly is some value on stock repurchase, I do believe we have an opportunity to gather more customers and we're seeing more in terms of results both on the deposit side and on the loan side, than we've ever had before. And I think their franchise value building results, so we'd like to keep that preference in place.

Mark Fitzgibbon -- Sandler O'Neill & Partners -- Analyst

Thank you.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Thanks Mark.

Operator

Our next question comes from Steven Comery with G. Research. Please go ahead.

Steven Comery -- G. Research -- Analyst

Hey, good morning.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Good morning.

Steven Comery -- G. Research -- Analyst

I just wanted to ask, first about the loan growth really strong across bunch of different categories, especially non-multifamily commercial real estates and good improvement in yields there too. Is there anything different, you guys are seeing competitively or just getting wins in your sales team.

John R. Buran -- President and Chief Executive Officer

Competition, obviously in the real estate area has continued to be strong. Driving pressure on -- in the multifamily space is for sure. So, given that we've had -- we have the capabilities in place for a number of years to move into more commercial business we've been doing that, and where -- where we continue to be focused on building relationships over time, so that has driven our, let's say pivot away from more transactional business and into a more relationship-based business. Competition remains fairly intense across the board, again multifamily in particular has been highly competitive, but we clearly holding our own and we see some opportunities based upon our capabilities to go direct to the customer in our real estate business and also to continue to grow our C&I business.

Steven Comery -- G. Research -- Analyst

Okay. Okay, very good. And then, I kind of want to ask about the seasonal deposit move, we typically see in Q1 and the NOW accounts. Firstly, is that something we should be anticipating for Q1 2019, and I am also kind of wondering how that sort of seasonal move fits into the goal of the loan-to-deposit ratio closer to a 100%.

John R. Buran -- President and Chief Executive Officer

So I guess, let me take the latter half of your question, while I think we would like to be closer to 100% as a, loan-to-deposit ratio goal that really is driven by our desire to just continue to build relationships and depository relationships going forward. So I would say the driving force is building long-term deposit relationships, not so much a particular number. See, can you just repeat the first part of that question.

Steven Comery -- G. Research -- Analyst

Yeah. Usually, we see a seasonal uptake in NOW deposits, just wondering if we should anticipate that in 2019?

John R. Buran -- President and Chief Executive Officer

Yeah, I think, we usually see a jump in those -- in our government deposits in January, it kind of starts to trail off a little bit by the end of the quarter. I think some of that trend is going to be mitigated, somewhat by our new Chinatown branch, number one, and also our success in the Win Flushing program. So, we may see generally the same trend, but maybe not as intense.

Steven Comery -- G. Research -- Analyst

Okay. When you say mitigated, what you mean is that your half growth from the Chinatown branch and Win Flushing, that'll mitigate.

John R. Buran -- President and Chief Executive Officer

Yeah, exactly, we are expecting to actually at least hit that number of $160 million from the Win Flushing program by the end of the first quarter and possibly more given the place that we're in now and then clearly the Chinatown branch, we do feel that we're going to get some very, very good results out of that branches as well. So we see those two factors mitigating some of the run-off -- some of seasonal runoff that takes place in the government portfolio.

Steven Comery -- G. Research -- Analyst

Okay. Okay, very good. And then just one more for me, if I may. You mentioned the efficiency ratio goal, are trying to get with the low to mid '50s. Maybe you could give us sort of like any indication on the timeline and expectations there.

John R. Buran -- President and Chief Executive Officer

So I think realistically for us that is, somewhat revenue dependent. So I think as we -- as we start to turn the corner on margin, which we don't expect by the way in 2019, that will be the kind of the icing on the cake for us or the big move. Meanwhile, what we're continuing to do is improve the productivity out of our branch system, so that we are both reducing expenses relative to the revenues that we increase.

Steven Comery -- G. Research -- Analyst

Okay, so with respect to improvement in 2019, but not necessarily reaching that goal in 2019?

John R. Buran -- President and Chief Executive Officer

Correct.

Steven Comery -- G. Research -- Analyst

Okay, very good. That's it for me. Thanks.

Operator

Our next question comes from Collyn Gilbert with KBW. Please go ahead.

Collyn Gilbert -- KBW -- Analyst

Thanks, good morning everyone.

John R. Buran -- President and Chief Executive Officer

Good Morning.

Collyn Gilbert -- KBW -- Analyst

Just wanted to circle back on the expense discussion. So Susan, I know you had indicated where you thought one quarter expenses were going to go, but that's obviously not running at a lower run rate than what, what you guys has put up. What is the outlook kind of maybe for year-over-year expense growth given some of the initiatives that you have. Do you think you can lower and keep expenses lower in '19 then where you put them in '18.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

We anticipate the expenses increasing in the low single digits, very similar to the total expense growth we had from '17 to '18.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay, all right, that's helpful. And then just back to the NIM. Hearing your comments on expecting it to continue to compress, and John, you know you just indicated throughout '19, but can you quantify that a little bit more.I mean in terms of when you're talking about compression or are you talking about the core NIM, or you talking about reported NIM and maybe just framing your thoughts there a little bit and does that indicate to you that NII, is that going to continue to drop. Are you going to try to increase NII through the growth.

John R. Buran -- President and Chief Executive Officer

So we try and increase NII through growth. The core NIM is -- was down. We'd focus on core NIM obviously, because we can get more prepayment penalties, but that's just what you want to hold in the next quarter or the next period in terms of your -- in terms of NII. So we don't view that as a real strategy. It looks nice for one quarter, but are you going to deal with the lack of growth in the quarters going forward. So if you look at the net interest -- with the core net interest margin for us, 3 basis points is probably the best that we've had all year and we had a couple outlined quarters, last quarter.

For example, we had a big drop in core net interest margin, but it's clearly been in the single digits with 3 basis points being the lowest in the -- 3 basis points being the lowest in the last year. So we think we're getting a little bit better between the, the loan yield growth and our ability to control some of the deposits, but at the end of the day, we are still a spread-based business, not going to make any major changes there, so the curve and the shape of the curve is going to be ultimately deciding factor for us, particularly as it relates to loan pricing going forward.

Collyn Gilbert -- KBW -- Analyst

Okay, that's helpful. I will leave it there. Thank you, guys.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Thank you.

John R. Buran -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Brody Preston with Piper Jaffray. Please go ahead.

Broderick Preston -- Piper Jaffray -- Analyst

Good morning, everyone. How are you?

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Good morning, Brody.

John R. Buran -- President and Chief Executive Officer

Good morning.

Broderick Preston -- Piper Jaffray -- Analyst

I just wanted to, I guess maybe get a little clarity on the NIM guide. I wanted to understand, I guess maybe the rate dynamics you're expecting with regard to rate hikes this year within that guidance?

John R. Buran -- President and Chief Executive Officer

So, as I mentioned in the prepared remarks, we are thinking three, if it is less than three, we might be doing a little bit better, so that kind of gives you an idea there, but then again, it's a combination of not only rate hikes, but it's also the shape of the curve that's important to us since we do think that we vis-a-vis, a more reasonably shape curve. We have a significant opportunity on the loan side, because we have over the course of the last couple of years put on more variable-rate loans. So if you look at the repricing that we have on one of the sheets in our presentation, I'll get the page number for you in a second, but the $2 billion is weighted very, very much toward with 50% of it to be exact, it is in the first year and that is really a result of the continued growth of our -- it is on page 11 of the presentation, is our continued growth of the variable rate portion of our loan portfolio, which of course, those variable-rate loans move up with the -- with the market on a -- generally on a three-month basis so -- or sometimes even on a month basis. So we see a lot of leverage on that side, so the shape of the curve is critical to -- is critical to us.

Broderick Preston -- Piper Jaffray -- Analyst

Right, so when I look at your -- at the repricing rate that you guys have laid out for those loans through 2021. It doesn't look like you're assuming much in the way of loan yield expansion of those rates. Is that a fair statement.

John R. Buran -- President and Chief Executive Officer

Well, in '16, there I think was the -- in 2019 we're talking actually 80 basis points. And I was wondering --

Broderick Preston -- Piper Jaffray -- Analyst

No, I mean like the (inaudible), it doesn't look like you're -- like you've assumed -- like I understand the roll on roll-off as a pretty favorable delta. But I'm just speaking to the -- to the actual repricing rates on a year-by-year basis, it doesn't look like you've assumed much in the way of a benefit from further rate hikes or curve deepening.

John R. Buran -- President and Chief Executive Officer

Well, again, we're projecting those three rate increases in, we're projecting this those three rate increases this year and really not much change in the out years.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

This probably -- this table is put together with the interest dynamics we had at 12.31%. So obviously, if there are rate increases, et cetera throughout the year, these numbers will change.

Broderick Preston -- Piper Jaffray -- Analyst

Okay. Okay, I guess what -- I guess, ultimately, since we don't have time to drive that, is if the fed is on pause and we had no rate hikes this year, I get that the deposit beta is probably going to continue higher. Just given the lag that happens with funding costs moving higher but it -- that occurs. Could you start to see given the fact that you still do have have a decent amount of CRE and multifamily on the book, with the lower deposit beta moving forward, could we start to see some NIM stabilization by year-end?

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Yes, the scenario you laid out it is right. We believe that the deposit beta will slow down, if there are no rate increases. The repricing of the loans don't have contractual increases given the higher rate environment that we had a few years, five years ago when these loans are written. So we would expect to see either stabilization or expansion with no rate increases.

Broderick Preston -- Piper Jaffray -- Analyst

Okay, great. And then I guess maybe on the, on the swaps that you guys have layered on, what -- I guess and what's -- in what interest rate scenario does those become, I guess harmful to the NIM, is adjusted rate decreases or is there a threshold that you need to reach to see those start to negatively impact the NIM.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

It would be in a decreasing rate environment, those would be come harmful to the company.

Broderick Preston -- Piper Jaffray -- Analyst

Okay. And then maybe just sticking with the NIM for one more question. On the securities, that you sold out of, it was the $120 and then you move them into about $113 million more in higher yield and securities. I wanted to get a sense for what the spread between the yields in those new securities versus the old securities was?

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

In the prepared remarks, in the press release, I believe it's about 100 basis point, as I recall. It went from about $240 million or $340 million and we bought mostly floating rate securities with the new funds.

Broderick Preston -- Piper Jaffray -- Analyst

Okay. All right. And then I guess, I just wanted to go back to the, the brand strategy on the Universal Banker model, it seems like it's really working out well for you guys and I wanted to better understand. Does that -- is that driving increased transactions just with the retail customers? Or do the Universal Bankers help with commercial customers as well?

John R. Buran -- President and Chief Executive Officer

So we have -- the short answer you set -- the short answer is yes. So there is much more let's say substantive customer engagement taking place because we don't have the -- we don't have to have staff against transaction volumes. So the quality of the interactions with the customers are better leading to more sales opportunities, whether it's consumer or commercial and clearly we are focused on the commercial business. So that's -- it's very, very helpful.

In addition, we had put in place a number of years ago, a business development team that is associated with the branch network that is focused on continuing to develop commercial relationships and then we also have a team that works, the our traditional commercial real estate portfolio to deepen relationships there. So we've got three different areas operating and clearly, the most recent one, the most reasonable is seeing a significant improvement is the branch network where we have more substantive discussions and clearly much more sales.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Brody, I'd like to go back to your investments for a second. We do disclose in the press release that we sold securities with an average yield of 2.41% and reinvested securities with an average yield of 3.70%. So it's about 130 basis points, and again, those were reinvested into floating rate securities.

Broderick Preston -- Piper Jaffray -- Analyst

Okay, great. I must the skimmed over that. Okay, and so I guess, I just wanted to touch more on your C&I growth, you guys have done a really good job there, and it seems like when I look at the non-interest-bearing account growth as well. It seems like it's at least self funding a decent portion of it. I wanted to get a sense for like what that actual percentage is, in terms of, I guess, the loan-to-deposit ratio on an incremental C&I relationships.

John R. Buran -- President and Chief Executive Officer

We really don't have, we don't have that information available. We really haven't put it out publicly.

Broderick Preston -- Piper Jaffray -- Analyst

Okay.

John R. Buran -- President and Chief Executive Officer

I mean, we have the information available we just haven't discussed it publicly, but let me give you some guidance on it. Every C&I loan has a minimum of a 10% compensating balance requirement and then usually in the C&I portfolio in order to pay for services, like for example, remote capture or other cash management, cash management type services. Companies usually add additional non-interest-bearing deposits in order to cover the cost of those services on a -- the compensating balance basis.

Broderick Preston -- Piper Jaffray -- Analyst

Okay, all right, that's good color. And then I guess, are there any industries where you're having particular success within that C&I bucket and growing loans?

John R. Buran -- President and Chief Executive Officer

Professionals in particular where the loan, the loan requirement is less than the deposit opportunity and we look to grow that portfolio more obviously to more industrial companies, it kind of works the other way.

Broderick Preston -- Piper Jaffray -- Analyst

Right. So that would -- that mean you're talking about lawyers and accountants.

John R. Buran -- President and Chief Executive Officer

Right. Lawyers, accountants, other service -- medical professions another one.

Broderick Preston -- Piper Jaffray -- Analyst

Okay, all right. And then I guess one more from me, understanding that overall asset quality remains very good. I just wanted to touch on the four business banking loans. Are those concentrated within any specific industry or could you give a little bit more color on those loans?

John R. Buran -- President and Chief Executive Officer

No, they aren't concentrated in any specific industry. Let's see if you look at this $26 million of substandard loans, seven individual loans and all are paying as agreed with the exception of a $1.5 million of exposure. So what we're dealing with here are predominantly, probably the Provident defaults.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

And to be clear on the $1.5 million the largest piece of that, that is not paying as agreed is, it's a loan that's past its maturity we're still receiving payments on it, but since we don't really have a renegotiated agreement, we're saying that is not paying as agreed.

Broderick Preston -- Piper Jaffray -- Analyst

Okay.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

But it is paying.

Broderick Preston -- Piper Jaffray -- Analyst

All right. Thank you very much for taking my questions around.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Thank you.

John R. Buran -- President and Chief Executive Officer

Thank you.

Operator

This now concludes the question-and-answer session. I would like to turn the conference back over to Mr. Buran for any closing remarks.

John R. Buran -- President and Chief Executive Officer

Well, thank you. Thank you all for joining the conference. I think just to wrap up very quickly where, we continue to focus on these strategic initiatives that we've outlined within the -- within the presentation. I think we're seeing some success here and we hope that we can continue to have these conferences. And if anybody has any individual questions, you know where to find us. So thank you again.

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Thank you.

Operator

This concludes today's teleconference. You may now disconnect your lines and we thank you for your participation.

Duration: 52 minutes

Call participants:

John R. Buran -- President and Chief Executive Officer

Susan K. Cullen -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Mark Fitzgibbon -- Sandler O'Neill & Partners -- Analyst

Steven Comery -- G. Research -- Analyst

Collyn Gilbert -- KBW -- Analyst

Broderick Preston -- Piper Jaffray -- Analyst

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